Cross collateralisation
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This document discusses the pros and cons of cross-collateralizing property loans. Cross-collateralization occurs when multiple properties are used as security for a single lending portfolio. While it provides advantages like lower interest rates, cross-collateralization also poses disadvantages for serious property investors, such as lack of flexibility and control over the portfolio. The document analyzes the disadvantages in depth and concludes that while cross-collateralization may be suitable for some, serious long-term investors are generally better off with their loans structured separately without cross-collateralization.
Cross collateralisation
- 1. L o a n W i z e – W i z e U p t o y o u r B e s t F i n a n c i a l D e c i s i o n Page 1 Home Loans Investment Loans Business Loans Commercial Property Loans Asset Finance Fact Sheet: Cross Collateralisation If you have a keen interest in property investment, then you have no doubt heard from the well intentioned that it is always better to keep your property portfolio non-cross collateralised, but do you understand why and what it really means to be Cross Collateralised in the first place? What is Cross Collateralisation? Cross collateralising occurs when more than one property is used as security to support your lending portfolio at one bank. For example you have a home worth 700K and an investment property of 300K with total outstanding total debts of 200K. If you default on the loan the lender will decide which property to sell to recover its debt. It may be the lender considers your owner occupied home easier to sell and may do so if the properties are cross collateralized. It is very common when acquiring investment properties to provide existing security over your home property as supporting security for your new property. So why wouldn’t you? Is it wrong to have your loans Cross Collateralised? There really is no correct answer to this question, despite many that claim that you should never have your loans cross collateralised. This is always dependant on your personal circumstances, and it comes down to the type of investor you are or would like to become. For serious property investor with a goal to acquire multiple properties quickly, then having your loans non cross collateralised often provides advantages over cross collateralised positions. I have included below ten reasons why Cross collateralisation of your properties may cause problems for you as a property investor, and the types of problems caused. Ten disadvantages of Cross-Collateralising your property portfolio… 1. When you sell a property in a cross-collateralised structure you may not see any of the funds as the bank may request some or all of it to go back in against the existing loans to strengthen their position. 2. When you sell a property you have to resign all of the existing mortgages. Extra unnecessary paperwork. 3. You can lose product selection and control by being with just the one bank. For example the bank can say no more interest only loans for you, we want you to take a Principle and Interest loan from now on, to reduce your debt with us. This is quite common when your borrowing levels get up with the one funder. 4. The Bank holds far more security than often necessary, for example Property A worth $800 000 is used to buy property B for $250,000. The bank has $1,050,000 of assets against $250k of loans. The result is that the bank holds all of your cards. 5. Buying across state boarders you may be subject to mortgage stamp duty of that state, this in itself is OK, but when you have other properties as security for the purchase, regardless of the state they are in you may have to pay the mortgage document stamp duty on the entire loan amount, rather than just on your purchase price.
- 2. L o a n W i z e – W i z e U p t o y o u r B e s t F i n a n c i a l D e c i s i o n Page 2 Home Loans Investment Loans Business Loans Commercial Property Loans Asset Finance 6. Having at least two lenders gives you the flexibility of playing one off against the other, giving you more choice and ultimately more control. Although having a good mortgage broker can also provide this advantage as well. 7. If you want to realise some increased equity when properties have grown in value you need to have your whole portfolio revalued (multiple valuations instead of one, again an additional and unnecessary cost). 8. You can run out of borrowing capacity with one lender when you reach their maximum serviceability / exposure levels. Each lenders have widely differing policy and calculations when working out your serviceability, and it pays to have options available to you outside one existing lender. 9. It is so much harder to move banks when they have control over all of your properties, if you no longer like or agree with their service or lack of. 10. If at any time you have cash-flow problems, your whole portfolio is at risk. Better risk management from your respect is to not cross. Advantages of Cross-Collateralisation So why do investors do it? To be fair, there may be some advantages from time to time: 1. Pricing concessions are often available if your debt volumes are above certain limits. You may save an additional 0.2% on your interest rates for borrowings above $1m. 2. All of your lending in one place provides you with advantages in relation to simplicity of online banking and accessing your accounts from the same internet banking portal. 3. When buying your first investment property it is quite often the easiest option if borrowing the entire purchase price. Our advice is tailored to suit your personal and individual requirements, taking into account your short and long term goals. Many investors who only have a goal to purchase one or possibly two investment properties will be perfectly suited to having their loans cross collateralised, and it is a sound structure when you are acquiring your first Investment property, however for serious investors seeking a long term strategy of property investment, then I usually recommend having your portfolio non cross collateralised. Which type of investor are you? At Loan Wize, we are passionate about property investing as we are property investors ourselves. We believe that there are many ways to create serious wealth through property investing. If you would like to discuss these and other issues facing property investment, then give us a call and make an appointment to see one of our Professional Lending Specialist’s today We also have a team of specialists that know the property industry inside and out. It is imperative that you get great advice and the right property specialists in place before you make the decision on which property is right for you. We can help you partner with these specialists going forward so that you can ensure you are making the right decision from the outset. If you would like more Details on Property Investing or would like to speak to a Professional Mortgage Specialist about your personal circumstances, please phone Loan Wize for an appointment.