Cross collateralisation is the process whereby a loan or loans are secured by multiple properties you own.
To explain further, your collateral is what you offer the lender as security when applying for a home loan. Depending on how your loan is structured, it will be secured by a single property you already own as a ‘stand alone’ loan, or secured by multiple houses in your portfolio so they are ‘cross collateralised’.
Let’s take a quick view of the potential pros and cons of cross collateralisation, remembering that these may be different for you based on your individual circumstances.
- It’s (theoretically) easier to deal with a single lender
- You can use one property as the collateral to purchase the second property without using your own cash •
- As equity grows in your investment properties you can access it easier, i.e. you don’t have to apply to a number of different lenders to extract equity from each property
- The large loan size may lead to discounts on charges and interest rates
- One lender may decide they have too much exposure to a single client, refusing you further loans
- A single lender may not have the best products to suit all situations
- If you sell off one property it might mean you need to have the whole loan portfolio restructured
- Lenders are naturally risk averse, so if given the opportunity they will obtain as much security as they can for the loan, and this may not be ideal for you
Some people say that by having all your loans with one lender you are more exposed if something goes wrong. This is potentially true and something to consider.
Let me explain : Let’s say you run into a problem and are forced to sell a property resulting in a deficiency balance, i.e. you owe the lender more than you were able to sell the property for. In this situation, if the lender has other properties secured against the loan they can easily force you to sell another property to recover their money. If the other properties are with other lenders and the loss is only small they may not feel that it is cost effective to persue you through the civil court process to recover their loss but they would certainly put very adverse comments on your credit history.
So, if you are building a property portfolio, weigh up the pros and cons of ‘stand alone’ and ‘crossed’ loans, and importantly seek unbiased expert advice on what will be right for you. A mortgage broker can advise you on the finer points of loan structuring so that in consultation with your legal and accounting advisers you can make informed decisions, not only for your current situation but for your future financial security.
You can contact me on 0419 635 692.