how much deposit?

[QueenBee]

It is to use an existing property - be it your own home or another IP as security with the Bank to gain 100% finance for another IP. That's crossing. But it's very hard to get the Banks to uncross them, because they want you twisted up in knots as much as they can.

Cheers, QB

P.S. I have recently uncrossed, it was extremely stressful.

[Ted]

How did you uncross them Queen?

Ted

[Sapphire]

Cross-collateralisation is the same as using equity in your current property(s), isn't it?

When you tried to uncross them, were the properties with the same bank or different?

Maybe you could tell us which bank as we are considering a 2nd IP using equity in our 1st IP in the near future.

Regards
Sapphire

[QueenBee]

How did you uncross them Queen?

Ted

With great difficulty. When we decided to buy our first IP we had a home with quite a bit of equity in it. We went to the Bank (Westpac) and asked if they would give us 100% finance to buy an IP. They said yes, of course. They used our home as security (cross collaterisation). Then within probably only 6 months, we bought two more IP's 100% finance, using our home as security again.

When we first decided to do it with no money down, we didn't have any savings so couldn't afford a deposit that's why we chose 100% finance, anyway we had read Rich Dad Poor Dad and he said use OPM (Other People's Money).

I was freaking out a bit at the time using our own home as security but I said to the Consultant I was dealing with at the time, "tell me how do I get the security off". She said "when you have enough equity in your 1st rental, that would be the equivalent of what you would have paid as a deposit, then that house is able to stand on it's own and we can remove the security". So I was quite comfortable with that because I knew house prices were starting to rise and security wouldn't have to be on it for long. I also asked her if it was complicated and if it would cost anything. She said no, you just ring us with the new valuation and we will take it off.

About 6 months later 2 of the IP's had heaps of equity in them so I went to the Bank one day and asked for the security to be realeased. They said no, all the mortgages were together (which they weren't because we bought them all separately) and that we would have to have all the properties with enough equity in them to release them. Basically we couldn't do one at a time like we had been told, they all had to be done together. I was really angry, I argued with numerous people until I was blue in the face, but they wouldn't budge.

So we then have three rentals, with security on our own home. We were also in the position of having our own business, and not "being a normal robot and bringing in a normal wage", (my words, not theirs), so when we tried to buy another IP we hit the wall with the Bank. This where it all gets complicated in my eyes, and I still find it very hard to get my head around it.

Even though they take the rental IP incoming rents as income or 75% of it, they decided that even though we were making reasonable money, they said we now couldn't afford to "service" another IP. We qualified for all the criteria, but couldn't service it. I asked them what that meant. They said that if all 3 IP's were to be empty at the same time, I would have to have enough money coming in through wages to be able to pay those three mortgages myself. My question to them then was how do all these people manage to get like 50 rentals, they would have to be millionares in their own right (excluding rental income) to be able to service 50 mortgages if needed. I still don't get that part really.

Then we decided we wanted to buy another house for ourselves and make our old house into a rental.

Anyway, they wouldn't give us any more money so we decided to try somewhere else. We found one through another Lender. The plan was to get our old house revalued, take all the equity out of it and put it into the new house, thereby giving us maximum tax benefits and also the advantage that our new own house didn't have a huge mortgage on it. The new lender was going to take over the new mortgage on the old house, as well as the house we were buying.

That's when we struck major problems with Westpac. By then we had a new Consultant who was on a bit of a power trip.

Everything was going unconditional in a couple of days for the houses when the Broker and Lawyer and ourselves realised that our old house still had the rentals cross collaterised on it. I rang the Consultant, who informed me that he thought it wasn't a very good idea that we were buying another house, that in his opinion he thought maybe we hadn't thought it through properly, blah, blah, blah and he would have to send all the info into Wellington to another section of the Bank for approval. But he said it wasn't looking good.

My lawyer sent a too nice letter to the Consultant, asking for approval. We were going unconditional in 2 days. Still no answer to his letter/fax. The unconditional day arrives, still no answer, we have to get a one day extension. I ring up the Consultant, they still have no answer. So I type up an email to the Consultant, telling him that he's a complete idiot and I hate his guts. I don't send it. I go to bed. I can't sleep. I get back up and re-write the email, toned down considerably, basically telling them that if they don't realease the security by 10am tomorrow morning I will be taking ALL the rentals off them and refinancing elsewhere. My bluff worked.

9.05am the next morning, the Consultant rings me and says, Hi, everything is fine at our end, it's been approved.

I have actually complained to Westpac about this Consultant, and they have given me a new one, and have fallen over themselves being nice to me.

So that's what happened to me. Hope this helps answer some questions and it would be interesting to hear how other people have got around any of the problems I have encountered.

Regards
QB

[Foxy]

Banks mostly look at the percentage across all the properties they can use for security Therefore if you are utilising equity from your existing home to purchase IP they will take security over both, with cross guarantees from one to the other. i.e

Own home value $400,000 Borrowing $280,000

Buying IP
IP value $200,000 Borrowing $200,000

total security $600,000 ttl Borrowing $480,000

Value of borrowing as % = 480000/600000 or 80% (or 20% deposit).
Both houses are now tied to the bank in case of default.

To release security (or uncross) the bank would have to be happy with the security for just one property, usually you can request the security released from you own home when you have 20% equity in the IP (either paying loan or increasing value of IP).

Gets really complicated when people keep getting deposits from their own home to fund more and more IP's.

[SJL 01]

I bought another one last night out of the paper - a 2brm unit with a garage for $105,000, market value is between $130,000 and $140,000. It will rent for $180p.w.

Hello,
Quoting Graemes post above, I wonder if you would be able to share your strategy for this deal with us?

Is it a hold or trade?, as given the figures you quote it is not likely to be +CF, and knowing that you subscribe to P&I loans, the negitive CF will be considerable.
Perhaps it is capable of more rent, or you are simply buying the 25% discount, with a view to using the equity for another deal - although the surplus equity is only around 7k assuming a value of 140K.
Would really appreicate knowing your strategy as we can all learn from each other.

Many thanks
LL

[oc]

Cash +ve or -ve surely its a matter of timing buy today with no deposit or next week. month, year, decade or century when sufficient have been aquired.

Do the maths - capital + rental income versus saving on capital costs.

OC

[Julian]

Graeme's purchase looks about neutral - slightly negative.
80% of $105,000 = $84,000
$84,000 @ 7.5% P&I over 25 years = $143.25 per week.
Leaves $36.75 per week for rates, R&M, vacancies and insurance.
Also have to factor in legals, finance costs (if any), valuations and the like.

My guess: Graeme's going to clean it and flick it for a gross return of about $25k which will nett about $15k after GST and income tax.

Am I on the money, Graeme?

Julian