Cross-Collateralisation Mortgage
Cross-collateralisation or cross-securitisation is a strategy property investors with more than one property may wish to use when applying for a new loan.
Some investors will try to avoid cross securitising their properties, but with recent lender structures, government pressure from APRA and policies often changing, avoiding cross collateralising may not be the best strategy or even an option for some people.
There are also many mortgage brokers who advise against cross-securitisation to minimise borrower risk, as it can be disastrous when things go wrong, such as loss of income, tenants and falling property market.
However cross-collateralising is not all bad news and can sometimes be the best solution, depending on an individual borrower’s circumstances. With banks continuing to tighten their lending policies as a result of APRA led reforms, increasing borrowing power through cross-collateralisation is a strategy that is starting to appeal to many property investors.
In this post, I will cover what you need to know when deciding whether to cross-securitise your next loan, when and how.
Read below to find out:
- How does Cross-Collateralisation work
- Why Cross-Collateralisation can be good
- Cross-securitised home loan success story
- Why Cross-Collateralisation can be bad
- When should you Cross-Collateralisation
- When should you avoid Cross-Collateralisation
- Strategies for avoiding Cross-Collateralisation
- Key takeaways about Cross-Collateralisation
1. How does Cross-Collateralisation Work?
In any mortgage, a lender will take security against your home so they have protection in the event of default. Cross-securitisation or cross-collateralisation refers to the situation when a lender takes security against more than one property by effectively bundling your loans together.
To illustrate this through a simple example:
- You currently have a loan of $500,000 against a property worth $750,000
- You are interested in purchasing an investment property worth $500,000
- This means that:
- The total value of your properties is $1.25 million
- The bank will lend you up to 80% of the combined value of the properties – which is $1 million
- Because you already have a $500,000 loan, this means that you can borrow up to another $500,000 to purchase your new investment property – meaning you don’t even need a deposit. This is also known as a leveraging from equity.
2. Why Cross-Collateralisation Can Be Good
As the simple example above illustrates, Cross-Collateralisation can be beneficial by allowing you to access equity in properties you already own, to maximise your borrowing power for any further property purchases. In the example above, if you had not cross-collateralised your properties, you may only be able to borrow up to 80% of the value of the new investment property which is $400,000. This means you would need to find another $100,000 plus fees such as stamp duty in order to secure the property which may mean you miss out on the property of your dreams. One way of doing this is to refinance and withdraw the equity/deposit from the current home to help borrowing with another lender.
Alternatively without cross-collateralisation you might be able to borrow up to 95% loan to value ratio (LVR), however with cross-collateralisation you would be able to borrow the same amount without exceeding 80% LVR which means you can save on lender’s mortgage insurance (LMI) and also potentially reduce your interest rate.
Contrary to what some believe, Cross-Collateralisation does not have any impact on tax – you can still split your loan between your investment and owner-occupied home so you can claim interest on your investment property for tax purposes.
Cross-Collateralisation also means that you have all your loans with the same lender. Because of the high combined value of your loan, lenders may be authorised to offer you further benefits such as reduced interest rates (in some cases, reduced by more than 1% ) and discounted fees.
To discuss other benefits of a cross-securitisation strategy, contact us on 1300 138 943 or
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3. Cross-Securitised Investment Loan Success Story
Mortgage Corp have successfully assisted many investors secure investment loans using cross-collateralisation as one of the strategies. And recently, an experienced property investor was able to purchase his 3rd investment property borrowing 100% after we consolidated all of his loans through one lender.
This investor owned his own home, and also had two investment properties. He currently had loans with two different lenders. He was interested in purchasing another investment property in Queensland, an apartment in a resort with an advertised price of $550,000 and good rental returns for his retirement. As he had built up significant equity in all of his properties he thought he would have no problem obtaining financing for his new loan. However he had no luck with three different lenders.The main issues is that , the type of property, the apartment in the resort, he wanted to purchase was not regarded as an acceptable property for most residential lenders as it’s not a standard residential property.
We advised our client to cross-collateralise all of his properties with a single lender, however still splitting the loans between his owner occupier and investment properties. By simply doing this with one lender, we were able to unlock his existing equity in all his other properties – enough to achieve 100% finance for the new purchase, including duties. This resulted in an increase of borrowing capacity of $85,000 and it allowed him to look forward to a comfortable retirement with very good cash flow. Read more here about this cross-collateral loan success story.
Please note: Cross collateralisation borrowing is only available to property investors with more than one property and not first home buyers. First home buyers can look at other strategies for increasing their borrowing power such as a family guarantee.
Speak to a mortgage specialist to properly assess your individual situation and help you find the right loan and lender.
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4. When Cross-Securitisation Can Be Bad
Whilst cross-securitisation can be beneficial, it does not come without risk.
The main risk comes when you decide to sell a property that you have cross-securitised.
If you choose not to cross-securitise, selling an investment property is fairly straight forward – you would simply pay down any remaining loan and do what you want with any excess funds.
However cross-securitisation can mean:
- The lender may treat the sale as a refinancing. This means you may be liable for significant exit fees on the loan if it is a fixed interest loan and new valuations may be required to be done across all of your properties and new mortgage documentation prepared, which can be costly
- The lender may also re-assess your ability to continue to service your loan – if your circumstances have changed since you initially applied for the loan e.g. you have decreased working hours or the lender’s policies have tightened, this can allow the lender to require you to apply any excess funds against your loan secured against other properties
- If you still do not satisfy their lending requirements, this can also result in their forced sale of your other properties – causing a lot of stress and hassle, particularly if one of those properties is your family home.
In addition, other lenders may have attractive deals on their home loans from time to time. Getting yourself out of a cross-collateralised loan is far more complex and costly than a stand alone home loan and might mean you miss out on a more sutiable deal elsewhere.
In summary, there is a loss of flexibility when cross-securitising loans as it becomes more difficult to deal with any properties that have been secured or to switch lenders.
In our cross-collateralisation case study above, our client was approaching retirement, was planning to hold onto all his properties for a long time to earn rental income and was not planning to purchase any further properties. Loan flexibility was not an important consideration for him, however someone who has different objectives may find that loss of flexibility is not worth the hassle and cost if their circumstances change.
It is therefore crucial to consider your specific goals and make sure what you are giving up through cross-securitisation is not outweighing the benefits you receive.
Contact us on 1300 138 943 to discuss whether cross-securitising your next home loan is suitable for your circumstances.
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5. When should you Cross-Securitise
You should consider cross-securitisation if all of the following apply to you:
- You have significant equity in another property you own
- You have little or no deposit to secure your next purchase
- You have looked at other strategies to increase your borrowing power without any success
- It is NOT important for you to have flexibility to sell a property or switch lenders down the track
Circumstances can change so it is important you weigh up the benefits and potential risks of cross-collateralisation before deciding to go down this path.
6. When Should You Avoid Cross-Securitisation
Cross-securitisation is generally not advisable if:
- You have minimal equity in another property you own
- You have 20% deposit available already
- There are other strategies available to increase your borrowing power which don’t cost you anything
- You would like to keep the option open to sell one of your properties in the near to medium future, for example to allow you to take time off work to look after your children or finance a new business venture
- If flexibility is very important to you then cross-securitisation should be avoided at all costs.
To find out if cross securitisation is right for you, speak to a mortgage specialist on 1300 138 943.
7. How to get out of cross collateralisation
One way to avoid cross securitisation is to have two loans – one for 80% secured against your new purchase and another for the remaining 20% secured against your existing property. In this way, a borrower could avoid tying up the properties with each other as each loan is only secured against one property. However sometimes this is not practical as a lender may not offer this solution.
Another strategy is to make use of a portfolio facility, similar to a line of credit, against a home you own which has the most equity (usually your family home). A portfolio facility will have an approved limit and can allow you to set up multiple sub accounts. If you need a deposit for a new investment property you can simply draw down on this facility and create a new sub account for your deposit amount to keep the funds separate from your own home loan for tax. You can then borrow the remaining balance against your new investment property.
If neither of these strategies is available to you, you can consider increasing your borrowing power in other ways so that you don’t have to cross-securitise:
- Restructuring your loans and reducing your bad debt such as credit card debt
- Allowing a good mortgage broker to find the right lender for you who can maximise your borrowing power
- If you are self employed, working with your accountant to put your best foot forward on your loan application
To assess if cross-collateralisation is right for you and to explore all the other available loan options, click the button below to request a Free Loan Strategy Consultation with our loan strategist Neil Carstairs.
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8. Key takeaways about cross-securitisation
In summary
- Cross-collateralising is not all bad news. Increasing borrowing power through cross-collateralisation is a strategy that is starting to appeal to many borrowers as banks start to have more restrictive lending policies
- Cross-securitisation involves a lender taking security against more than one property that you own
- Cross-securitisation can be beneficial by allowing you to access equity in properties you already own, to maximise your borrowing power for any further property purchases. This can even allow you to obtain a no deposit loan to secure the property of your dreams. You can also save on fees including LMI, reduce your interest rate and be provided other benefits by your lender.
- You lose flexibility when you cross-securitise. Selling one of your properties can be a hassle and may even lead to the forced sale of one or more of your other properties. It can also be more difficult to switch lenders.
- Circumstances can change so it is important you weigh up the benefits and potential risks of cross-collateralisation before deciding to go down this path.
- Careful loan structuring and finding other ways to increase your borrowing power can help you avoid cross-securitisation. A Mortgage Corp lending specialist can help you assess your situation and identify strategies to achieve the desired outcome.
Cross-securitisation has its risks, however, when done right, it might be the best or only strategy for some property investors to achieve their property investment goals.
Take advantage of our Free Loan Structuring Strategy Session today and let us guide you to not only getting a loan but building a solid property portfolio.
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About Neil Carstairs
Neil is the founder of Mortgage Corp, an active property investor and awarding winning MFAA accredited finance broker with more than 10 years’ mortgage broking experience. Currently, Neil is one of only few MFAA Certified Mentors in VIC/TAS region.
He is known for his strategic approach to investing and ability to reach fast, successful outcomes for clients where his industry peers could not. Connect with Neil on LinkedIn.
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Based in Wantirna South, Melbourne (opposite the Westfield Knox Shopping Centre), Mortgage Corp is the most loved mortgage broking firm in Melbourne with consistent 5 star customer reviews. Mortgage Corp specialises in helping successful professionals and property investors maximise their return and strategically structure your loan for long term investment success.
Unlike most mortgage brokers that may be able to help you with general loans but simply don’t have the skills, experience or resources to genuinely help home buyers and property investors maximise long-term wealth, Mortgage Corp take a long-term, strategic approach to help our clients maximise their overall investment result. Request a Free Loan Strategy Session with our senior mortgage strategist Neil Carstairs today!
