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In a recent blog post we explained cross-collateralisation, how it works and the ramifications. Click here to read the original article. Below we present a case-study of a client in this situation and how he was able to move forward.
We were approached by an investor (referred to here as Simon) who was fairly experienced and had a good strategy in place to build his portfolio.
Simon had concentrated his efforts on researching property, finding good locations and buying dwellings over the previous 7 years. With a good income and steady employment Simon was able to buy his own home and 4 investment properties, and came to us with ideas of what he wanted to do next.
Our discussions centred around one of his older properties. This house was purchased in 2009, but had been built long before. Minimal, or no depreciation could be applied to it but, in the case of this investor, that was of secondary consideration.
As the property sits on a large parcel of land, a decision was made to demolish it, subdivide the land and build two brand-new dwellings on the plot. Obviously by subdividing, constructing two modern dwellings in place of the older style, less desirable building this adds considerable value to the investment.
Unfortunately the one area where Simon had fallen down was in the financing of his portfolio. All his loans, including his own home, were with the same lender. He had approached the bank directly and, regrettably, this particular lender cross-collateralised all his loans. His finances were in a tangle and he was stuck with paying principal & interest repayments across the board at an interest rate of a little over 4.5%. He was a major ‘Sticky’ customer!
We took his finances on-board, resolving to unravel his loans, secure better rates and put him in a much more favourable financial position. It took time, the properties had to be valued, and other lenders approached and loan products evaluated. However, at the end of the day we were able to separate the loans, change to a more accommodating bank and reduce his loan rates.
From paying a little over 4.5% interest rate with his original bank we were able to obtain 3.9% for his home loan and 4.2% for his investment loans. A significant improvement which enabled him to extract further equity to put towards the redevelopment he planned.
By undertaking this refinancing the client saved just over $7,600 per year. Not a small amount, and much better in his pocket than in unnecessary loan repayments!
Consider your own circumstances: Do you have more than one loan and are they all with the same lender and been cross-collateralised? It’s worth checking to see if you have the best set-up possible for your portfolio.
If you find you are in a ‘sticky’ situation with your lender, and you want to know if you can get better loan rates, we would be happy to speak with you and see if we can help in any way.