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.
Pros
- 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
Cons
- 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
A myth
I’ve heard people say that by having all your loans with one lender you are more exposed if something goes wrong.
I don’t believe this is true. Let me explain.
Example: 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 do you think the lender will just write off the loss? Will they say, ‘oh well we don’t have security over those other properties our client owns’? Of course they won’t! They will potentially force you to sell other assets (perhaps including your other properties) in order to recover their loss. In the end the problem is the problem is the problem!!
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.
