PPOR Linked to IP Loans

C

ChrisOs

I need some help regarding financing my next IP purchase.
I currently have a PPOR with a LOC facility that we have not yet drawn on - essentially, the PPOR is "owned" by us (i.e. there is no money outstanding on the loan, but the bank still holds the mortgage document). I have 3 IPs and all are linked back to the PPOR (the equity in the PPOR helped to finance IP1, then IP2, then IP3). The LOC has not been used to finance the IPs, as it has been relatively easy to create new loans for the IPs and I want to make a clear distinction between "my" accouts and the IPs, for tax purposes. In theory, the LOC could be used for PPOR renovations, or if I wanted to be really silly, to fund a holiday.

I have dealt directly with the bank (BankSA/St George) when setting up these loans and what I now know from the forum, is that this arrangment is very much to suit them and not me!
I would like to "untangle" these loans so that the PPOR is not at risk, not that I foresee any problems.

Question 1. What options do I have to reduce the risk to the PPOR? Should I bother?

Question 2. There appear to be enough references to "interstate" mortgage brokers on the forum that using one is a feasible option (I am in Adelaide and I am sure we have reputable mortgage brokers, I guess I need to find a creative one!) Does anyone from Adelaide in particular use an interstate broker or are there "locals" who will do a great job?

Thanks in anticipation.
Chris.
 
Cross Collateralisation

Hiya

Not an issue until it becomes one.

I know many people that have suffered financial and opportunity costs as a result of xcoll.

If you are a loking to do more IPs then I would consider breaking up the loans to 80 % lends.

This is not so much as due to a rsik to the PPOR thing, just better flex is possible.

TA

rolf
 
Chris,

You need to remove PPOR as security for each IP loan so as the IP's are self securitised.

Depending on the IP's value and what you owe, if the LVR on each is Max 80%, then I don't think you will have any problems with the bank removing the PPOR as security.

However if LVR is greater than 80 % then you may have to wait until equity in IP increases to reduce LVR.

Not sure how you go about it and what the costs are, maybe a solicitor should be your first port of call. Then again maybe have a chat to the bank and let them know what you want to do. In any case they will have to value your IP's.

In future IP purchases, DONT use PPOR as security, fund the 20% deposit through the LOC if you have to.

Cheers
Tweaker.
 
Thank you all very much for your responses.
I will chat to the bank first and see what their perspective is.
Regards,
Chris.
 
Hi Rolf and others,

I'm just trying to understand why it's best to have each property standalone as seems to be the consensus amongst all the experienced investors.

Cost wise, I thought it would be cheaper to xcoll. Could you please give an example of the added flexibility, and maybe an example of where xcoll has cost financially/opportunities.

Thanks,

Martin
 
Hiya

2 recent ones off the cuff

Cant refinance one or two out of 3 properties to another lender because first lender wont let singles go without a "credit" assessment.

Result, insolvency of the owners business.

1.5 mill props xcolled, want to sell because of marriage break up. Fixed rate loan break cost over portfolio, 63 000.

These are immediate extremes, I will show some others later one

ta

rolf
 
My poor understanding of finance and banks is if you go toes up, they can still take ppor to cover any shortfall associated with the IP's. So xcoll to your hearts delite. Please correct me if I'm wrong.
 
I'm just coming up against this one.

Bank has said I can't borrow any more. Most of what I have is with this bank. They claim servicability- but I think it's the $1M+ borrowings which makes them nervous.

So for the first time I have to go elsewhere.

But IP #1 has second mortgage against PPOR.

And the flock of bats was bought in a trust, requiring guarantees using equity in other properties (especially as LMI people required 70% LVR on the flock).

Now I have something like $750K equity on $2M worth of property- but I can't use any of it until I separate it.

I don't regret any of it. I needed to do that to move forward.

But in order to move forward further, I need an operation more complex than separating Siamese twins. And that will limit my opportunities in a fast moving market.
 
Hi Chris

The first port of call should be the relevant banks. Simply ask them to release the additional security. There may be some fees involved but they will be neglegible compared to refinancing.

I had a similar situation recently where I had used one of my IP's to buy 3 other IP's in a line. The market moved and I figured sufficiently to allow the release of the 4th property.

This loan is a fixed interest loan so I really didn't think I had a chance.

Anyway they went out and valued they phoned back to say I was $40k short I said in that case I will refinance elsewhere :( low and behold 2 weeks later I have the tittle deed sitting on my desk.

( I do have a fair bit of business with this bank and they do want to keep me as a customer)

hth
 
Thanks Rolf and others for the great replies. I guess it becomes more and more of an issue as the number of IP's owned grows, so it probably pays to do this from the start.

Thanks again, and if anyone has any other anecdotes I'd love to hear them too.

And sorry Chris for interrupting your thread, hope u don't mind.

Martin
 
HandyAndy et al,

Based on my own valuations I have < 80% LVR on 2 of the 3 IPs, so in theory the dependency on the PPOR for these two loans can be removed. To do this the bank lender said I would need to get both IPs valued (one in Adelaide and one in Cairns) so would be looking at approx $600 in costs for the valuations. Assuming the valuations come back OK, then the PPOR would be protected from any default on these two. Gradually, over time I should be able to do the same with the third, then the fourth etc.

I am not sure that the bank lender that I spoke with is:
a) Comfortable with this approach
b) Convinced it is necessary or
c) Just concerned that it will give me greater flexibility to move banks in the future.
Maybe c) or am I just cynical?

Thanks for all the replies guys.

No problems Martin – you didn’t interrupt the thread, you enhanced it!

Chris.
 
G'day Rambada,
My poor understanding of finance and banks is if you go toes up, they can still take ppor to cover any shortfall associated with the IP's. So xcoll to your hearts delite. Please correct me if I'm wrong
Click to expand...
You're probably quite correct. If they are holding the mortgages for both PPOR and IP's, then they hold all the Aces. But I don't agree with "x-coll to your heart's delight" - see Rolf's comments...... Why make things harder for yourself?

Something to consider (mine are set up this way) is to have PPOR loan with ONE lender, and IP's with any other lender. That adds a measure of protection to your PPOR.

For those that haven't started out this way, it is something to consider as time passes, and as your loans are "re-jigged" to suit the day. Perhaps this is something to consider down the track when re-financing......

Hopefully, though, as time moves on, your growing Equity should build some armour around you anyway, and such a move becomes un-necessary. And you could always just pay off the PPOR. Something to consider.....

Regards,
 
I think that Rambada is relating to a situation where a person goes under completely, and any/all assets can be taken to pay any debts, regardless of whether the lender holds the deeds etc.

If things actually got really bad, a PPOR without mortgage can in theory be taken to cover shortfalls. All that is needed is for the property to be in that persons name, or even partly in that persons name.

If the IP loan is just in say, the husbands name and the PPOR is in joint names, only 50% (normally) can be taken by the creditor.

However, I do think that things would have to get really bad for things to go as far as that example.

In general, in at least 99.9% of cases, I would think that the steps advised earlier by others would be sufficient.

Other business activities may affect that, but then other steps may need to be taken if you run a business that could have negative financial effects on you.
eg: Keep Business and Fully paid Property in seperate names, trusts being a good example I think. (I know very little about trusts)
I always kept the business in my name, and the property in my wifes name. ( I've been lucky so far)

regards
ABC
 
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