Cross Collateralisation

Myth 1: Separate collateralisation helps protect your house.
There’s a bit of truth in this but only a bit. People think that if a lender doesn’t have a mortgage on your home they can’t sell you up. Not true! If Lender A has a mortgage on your home and lender B has a mortgage on your investment property and you are in arrears on your investment property then you can’t keep your home safe by just keeping up payments to lender A. Lender B has a right to the money you owe them. They’ll sell your investment property first. But if it doesn’t produce enough money they’ve got the right to keep coming – and indeed to sell all your assets until they get their money back. So much for separate collateralisation protecting your house.

The situation with cross collateralisation would be similar. You have two accounts with one lender and are in arrears with your investment property. The lender has the option to sell both your houses – and they’ll do it if necessary – just as either lender could if you didn’t meet payments to separately collateralised lenders. It is true that if you’re cross collateralised the lender could decide to sell your home when you’d rather they sold the investment property. If it was distinctly more saleable than your investment property it’s a possibility. On the other hand lenders don’t like being cast as the bad guy on A Current Affair.

If your investment property has enough equity for the lender to recover their loan on it, and it’s clear you can service your home, then the lender is likely to leave your house alone. Of course it can’t be guaranteed that they will. But then if your investment property sells for less than you owe on it, separate collateralisation won’t save you either.

Myth 2: Cross-collateralisation is unwieldy when you’re refinancing.
You might have heard it said that under a cross-collateralised structure you’ll be required to re-value all of your properties when the time comes to sell or add to your portfolio. This is because your equity is calculated on the value of all your properties combined. Not only is this costly and inconvenient, it can also place limits on the amount that you are able to borrow if one property if one particular investment has not performed well.

It’s certainly possible and we’ve known clients to whom it’s happened, but cross collateralised lenders will often do the commonsensical thing and simply value the properties you believe will have risen in value since the last valuation. And guess what? That’s exactly what the story would be if you were separately collateralised.

Myth 3: Cross-collateralisation ‘locks you in’ to a lender.
This is really the nub of the whole issue. In principle cross collateralisation does lock you in, but remember if you read any normal loan contract, the rights it gives the lender will make your hair stand on end. They typically have the right to demand a whole range of things – from revaluation to their capital back (generally requiring you to sell up or refinance) at their behest. They don’t do it of course because they’re trying to make money by keeping you as a customer, not by handing you over to the opposition.

But it is true that the use of a single lender for your whole portfolio gives them lots of power over you – in theory anyway. But – and this is the crucial bit – given that all lenders have all sorts of rights you would rather they didn’t have, your real power comes not in the contract with them but in their desire to compete and your concomitant ability to refinance to another lender.

Busting the Myths. Your power to negotiate a better deal is a function of your ability to refinance! So long as your power to renegotiate a better deal is in tact you’re in pretty safe hands. Firstly because you’ll get the instant attention of ‘client retention units’ inside lenders when they get wind of your intention to jump ship and secondly because in the event that you don’t we can help you get it from the new lender you’ve chosen. But that involves exit fees I hear you cry! Indeed it does, but so too does refinancing with lots of stand alone loans. And guess what? Because loan structures are usually more complex and there are more loan accounts with stand alone finance, and because they’re often not aggregated into ‘professional packages’ we know of lots of instances where it costs lots more to comprehensively restructure a portfolio of loans obtained through multiple lenders.

By contrast completely refinancing a professional package often costs around $1,000. Not fun to pay but, so long as you don’t trigger your state’s stamp duty on finances, a quite minor expense and not one that should stop you rearranging a large portfolio of loans given the size of the benefits one is usually targeting with such an exercise.

And before I go I think it’s worth mentioning that we can get you the best of both worlds – finance through one lender but without cross collateralisation. Give us a ring if you’re interested and we can talk you through it.

The observations made here are general and indicative. They are not warranted as free from error in any respect whatsoever. We are not financial or tax advisers and you should not rely on any aspect of these comments without taking independent financial advice relating to your own specific circumstances. We suggest you obtain advice on a fee for service basis rather than from someone who earns commissions from investments they recommend.

Boomers put super squeeze on first home buyers

Wealthy baby boomers are snapping up apartments across Sydney to bolster their self-managed super funds, helping to dash the hopes of frustrated first home buyers.

Agents estimate super fund buyers have doubled since last year - some snapping up whole apartment blocks - as the numbers of first-timers in the market drop to a trickle.

Freelance writer and TV producer Tom Whitty has had a gutful. ''I'm saddened that both my girlfriend and I will have no choice but to work well into our 30s so we can squirrel together a deposit for that two-bedroom dive that she's so sure is just around the corner,'' he said in a familiar tale on smh.com.au.

Advertisements along  with being tired of real estate ''sharks'' and ''spruikers'' and ''snake oil salesmen'', he lamented the tax breaks for investors that would ''inevitably lead to a backlash on election day'' if they were removed. His story drew 862 comments.

Rocco Pirrello knows exactly how he feels.

The 23-year-old, who lives with his parents on the lower north shore and works in marketing for an insurance brokerage, has been looking for six months and is fed up with apartments selling for far more than agents say they will. ''The price guides are definitely underquoted in almost every case,'' he says.

The O'Farrell government's lure of $15,000 to buy a new property doesn't wash with him either.

''They're still too expensive,'' he says. ''I've gone to a few of the display apartments, but you need to fork out another hundred grand for basically the same thing but new.

''And it seems a lot of the people who are there are investors.''

It's a far cry from the first-timer glory days of 2009 when there were government grants of $14,000 - even $21,000 for new properties - plus stamp duty exemptions.

These days first home buyers of established property get nothing.

Ray White Elizabeth Bay's Laura Bitar estimates the number of investors using their self-managed super funds to buy property has doubled since last year, while the number of first home buyers has halved. ''At auctions, the investors are definitely outbidding the first home buyers,'' Ms Bitar said.

She remembers an auction day in 2011 - as those attractive first home buyer incentives were about to run out - where the properties at all 13 auctions went to first home buyers.

''We did sell four properties under $500,000 to first home buyers last month, but they all had their parents helping them.''

With the government incentives gone, parents paying at least part of the deposit is the only solution for many.

''My parents did help out a little bit,'' said 30-year-old lawyer Anthony Luk, who bought a two-bedroom apartment in Pyrmont for $653,000. He already had substantial savings.

''It just allowed me to get into the market a little bit sooner,'' Mr Luk said. Like many first timers, he's not keen on auctions so he snapped up the property beforehand. And he wasn't attracted by the government's inducements to buy new.

''I prefer older properties because I can see how it's maintained and managed,'' Mr Luk added.

Adrian Wilson, of Wilson Property Agents, who sold the property to Mr Luk said he was still seeing some first home buyers.

''For professional couples with a double income and a bit of a deposit, purchasing at $600,000 isn't such a stretch,'' he said.

Sydney property market prices boom to beat those in Manhattan, Paris and London

SYDNEY'S property market has stepped up to the world stage with inner-city prices topping those in Manhattan, Paris and London and uninhabitable hovels in the inner west fetching up to $800,000.

As the popularity of city fringe suburbs like Paddington, Darlinghurst and Surry Hills soars, some local listings are fetching more than $13,000 per square metre - pricier than lifestyle hubs in Manthattan, Paris, Hong Kong and London.

A dilapidated Newtown terrace with rotting carpets and holes in the ceiling, bequeathed to the RSPCA, sold at auction for $800,000.

Former London real estate agent and now host of Foxtel's Selling Houses Australia Andrew Winter said within just a decade Sydney has appeared on the international property stage.

"Years ago there was no comparing London and Sydney prices. But now despite what really is a minute population, Sydney is up there on the top 10 list of residential cities," he said.

"Sydney has become a 'lifestyle city' with people coming from all over the world to call it home. Even if they don't just work in Sydney, it has become a base for many international residents.

"Interestingly, when you look at these inner-city Sydney suburbs where prices now compare internationally, many of the homeowners have lived at some point in London, New York or Hong Kong, so they know what real estate can cost."

Sydney buyer's agent Patrick Bright said while other global cities market property with a price per square metre, or foot, Sydney real estate agents do not, making it hard for buyers or sellers to know what Sydney is worth by the metre.

Mr Bright said lifestyle, location and view all came into play with Sydney real estate and when all those elements combined it lifted local property prices to international levels.

"I think that's why auctions work so well here, because you might have an idea of what a property is worth, but when there's a stunning view of the water, emotion kicks in and the price goes up," he said.

The theory held on the weekend in Newtown where 27 registered bidders did battle for a three-bedroom Denison St property with rotten carpets, stained and peeling wallpaper and sunlight streaming through the upstairs ceiling, which had been marketed with price expectations of over $650,000.

Zanita Morgan's winning bid raised $800,000 for the RSPCA after the property was left to the animal charity in the former owner's will.

She said she and her husband, who bought the house with friends, planned to renovate and on-sell.

Last month, a 34sq m unrenovated studio in Elizabeth Bay attracted 42 registered bidders at auction and sold for $462,000, or $13,588 a square metre for a single room.

Jodhi Meare's plush Point Piper pad

Jodhi Meares, well known as the former Mrs Packer, swimsuit model and founder of the Tigerlily beachwear label, is selling her Point Piper apartment for about $2 million.

The apartment, in the converted Edwardian mansion Danmark, was purchased in 2004 for $1.23 million. It was part of the multimillion-dollar property package that formed part of Meares’ payout after the two-year marriage to James Packer ended.

Agent D’Leanne Lewis, of Laing+Simmons Double Bay, wasn't giving anything away as to who owned the beautifully renovated two-bedroom pad, but the title deeds said it all. They are registered in the name ‘‘Jodhi Kayla Packer’’.

The package also included a Paddington terrace valued at $900,000 for her mother and a house in Bronte, which Meares sold in 2002 for $3.41 million.

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Jodhi and James married in 1999 in what is said to have been dubbed, by her former mother-in-law Ros Packer, as the "wedding of the decade". With Elton John singing and more than 750 guests toasting the happy occasion, she was on the mark.

The apartment for sale has separate living and dining rooms, two bathrooms, a sunroom and garden terrace.

It has been redundant since Meares moved to Bronte, where she reportedly lives with rocker Jon Stevens.

The Point Piper apartment goes to auction on June 12.

Federal Budget Update

Budget ignored ongoing property weakness, but no major cuts to housing sector, assistance for seniors who want to downsize

THE property sector has once again missed out on Budget love with little direct relief for home buyers, sellers and investors.

The Budget’s housing centerpiece is a $112 million trial program to assist the elderly to downsize their homes without affecting pensions, via a means test exemption of up to $200,000 for ten years. It is designed to remove the disincentive for seniors to relocate to more age-appropriate housing, however, the program’s requirements that homeowners must have owned their family property for at least 25 years excludes many from receiving the benefit.

The days of federal Budget baubles such as the $21,000 First Home Owners Grant  are a thing of the past.

Meanwhile, construction industry groups expecting dedicated housing policy measures and supplyside reforms will be disappointed .

Among key initiatives they expected more incentives for potential buyers, housing infrastructure funding reform, support for building product manufacturers; support for trade training and job retention are missing.

Any government will be very careful about reintroducing the First Home Owners Scheme again or boosting it unless these is a big economic shock and a risk of the housing market collapsing by 30 to 40 per cent.

Grants had artificially inflated house prices against a backdrop of rate cuts designed to bring the dollar into check and stimulate new home starts.

Lack of any policy change will come as welcome relief to local investors who were concerned they may be targeted by the Budget axe.

Key concerns for investors have been ongoing suggestions that negative gearing benefits could be scrapped and and capital gains tax increased.

Real estate groups have also lobbied for first-home buyers to access their superannuation to purchase a property but this remained unchanged in the Budget. Despite the lack of direct federal support for housing there are some indirect benefits.

The budget included provisions for the government’s National Rental Affordability Scheme (NRAS), which supports investment in affordable rental housing, favoring projects supporting independent living for elderly and disabled Australians.

Superannuation reforms were announced, including the gradual increase of employer contributions from 9 to 12 per cent. The change to superannuation requirements may to see an increasing number of Australian’s utilize their nest egg to invest in property.

By Balvinder Ruby

Managing Director REEX Real Estate.

www.reex.com.au

Buying Properties off Auctions

Buying and Selling Real Estate