What is Cross Collateralisation or Cross Securing?
You may have heard your banker or mortgage broker use the term cross collateralisation or cross securing when discussing your loan scenario. The simplest way to define cross collateralisation is where a loan is secured to two or more properties.
You’ll find both bankers and mortgage brokers might structure or suggest cross collateralising all properties in your portfolio for a number of reasons. This structure does have its drawbacks and should be avoided. Cross collateralisation can reduce flexibility and can complicate your banking. Here are some examples why you should think twice before considering setting up your next loan:
Lenders Mortgage Insurance
Unfortunately the total lending is secured against all the properties. If you want to borrow more than 80% of the value of one investment property and there is isn’t enough equity over all properties than lenders mortgage insurance will become applicable. The lenders mortgage insurance premium is calculated on the total lending and could cost thousands of dollars.
Selling or Future Plans
When your loans are cross collateralisation and you decide to sell one, the bank will revalue the properties that will be held once the sale is completed. They’ll decided and control the sale funds and can demand that the sales funds be used to pay down the debt. This can be frustrating especially if you require the sales proceeds for other purposes.
Ease to Move
If your require additional funds and your lender declines the advance or is no longer competitive in the market with regard to rates and fees, it might be costly to move your portfolio from one lender to another.
If you’d like to sit down and go through some strategies, options and plan for the future feel free to contact me directly on 0410 000 689 – Nathan Vecchio
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