We often find that for a family in business, the cross over between business loans and investment loans is blurred. If your family has several real estate assets, and business assets, all offered as security for one loan you are “cross collateralised”.
Sadly having loans “crossed” rarely helps a family. In fact it mainly helps the banks. Families in business are much better off having stand-alone loans attached to one item of property (even if this means multiple loans for multiple properties). We have given the top 10 reasons below.
- If you sell a property you have to do all of the remaining mortgages again. This gives you extra paperwork.
- Banks often take a lot more security than they need (if it is there they will take it). This practice can reduce your borrowing capacity later on. Limiting a bank security position to one property also gives more transparency about your loan exposure. It allows you to focus on a debt repayment to free up security on one asset.
- If you have two lenders you can play one off against another. Having all your eggs in one basket (or lender) makes it difficult to argue rates.
- If you are crossed with your loans moving your entire loan book around is difficult. If you have stand-alone loans with one bank it is easier to exit yourself (or part of your exposure) from one lender. This is often the case when a family in business simply receives a lack of service from their current lender. It is not necessarily a case of cheaper money: the service and advice given is an important part of the banking relationship.
- If you are struggling with cashflow the whole property portfolio is at risk. Cross collateralised loans means that you have little capacity to negotiate. If you have multiple lenders the ability to move within their policies and test a bank appetite for debt is easier.
- If you want to access some of your equity and the loans are crossed: you need to have every one of your properties revalued. This creates extra cost with lots of valuers doing valuations.
- Some banks have a total debt limit for an individual client. If you have multiple lenders you can avoid the debt limit policy.
- If you have properties in multiple states the stamp duty in one state is payable across the whole loan portfolio; even though the properties offered for security are not wholly based in that state.
- If you sell one property within a crossed portfolio the banks can ask for the sale proceeds to be fully allocated against the remainder loan portfolio. If your loans are stand-alone you can choose how to use the sale proceeds – debt reduction, lifestyle and so forth.
- You ability to pick and choose products when you are committed to one bank only is more difficult. This is the case if the bank in question decides on a change in policy across the board and you are subject to the whim of that bank. This could happen if your bank unilaterally decides that it does not want to have anymore residential mortgages on an interest only basis and converts every loan to principal and interest.
So have a chat to your bank. If the reason given is that it will cost you more ask “exactly how much more”. The answer often falls back to a loan management fee with the bank.
Even better – ask for your accountant about their loan review package. Your accountant should be mapping your loans, asset exposure and tax structuring of loans to create a strategy to free up security positions, maximise tax benefits to facilitate future growth or for future asset protection advantages. At Westcourt we do this kind of strategy work for a lot of our clients (regardless of who the tax agent is).
A simple question can result in a big impact