Cross collateralisation in finance is the process of securing a loan by two or more properties as security. This gives the lender the power to use those properties as security when one of the home loans/mortgages is in default, compromising both properties for the benefit of one.

For people looking to build their property portfolio, using cross collateralisation is appealing as leveraging your assets’ equity usually comes with advantages. These include:

  • Accessing more equity in total, rather than just one property’s equity.
  • Borrowing larger amounts due to the larger equity pool.
  • Getting better interest rates due to the lender’s increased security position, which lowers the lender’s risk in lending.
  • Claiming potential tax deductions from using the equity in owner-occupied property for an investment property.

Conversely, these advantages can also apply for people who want to downsize their property portfolio. It just comes down to the circumstances in property portfolio’s overall value and equity.

However, applying a cross collaterisation strategy to home loans has several disadvantages and risks. These include:

  • Any property that declines in market value, all properties used in the cross collaterisation declines the rate of equity building.
  • Defaulting on one loan compromises both properties (or more) as the lender has the discretion to sell those properties repay the loan owed.
  • Banking and refinancing become complicated as you’re tied to the same lender for all properties used in the cross collaterisation.
  • Flexibility is lost in the process of selling one or more properties used in cross collaterisation.
  • Refinancing a single loan means each property in the cross collaterisation equation must be revalued with an expensive valuation report from an expert, third party. Depending on the valuation amount increasing and decreasing, the lender may need a variation of security, which comes at an additional fee.
  • If a refinance application is rejected due to a decrease in the properties’ value total (from the valuation reports obtained on each), it can trigger changes in the home loans attached.
  • Lenders Mortgage Insurance costs increase due to the loan-value-ratio created by the combined property values and loans attached.  

Generally, given every borrower and borrowing position is different, cross collaterisation gives lenders greater advantages and the overall edge due to the increased power and control position, and a cleaner more simplified paperwork prospect.

That’s why a stand-alone security strategy is often the recommended approach. And is recommended by mortgage brokers more than lender professionals for the reasons outlined above.

What’s needed is an experienced mortgage broker who is motivated to uncover all the information available to expertly assess and gauge the best approach for people to effectively and strategically build and manage their property portfolio. At Get Real Finance, we’re on the journey with you. We feel out where people are in their financial and real estate journeys and create a supportive space to explore the possibilities. Where we can, we motivate and educate our clients to reach their goals. Book a complimentary strategy session with one of our brokers.