WHAT IS CROSS COLLATERALISATION?

Why banks love it and a good mortgage broker will advise you to avoid it.

Cross Collateralisation is an important loan structuring issue of which many property investors are not aware. It occurs when one or more properties are used to secure a loan or multiple loans. There are several important issues to consider as there are both pros and cons.

Pros

• Lender may apply Interest rate discounts
• Low account keeping fees
• Convenient if the investor is not likely to purchase anymore properties

Cons

• Loss of flexibility and control when you want to sell any properties
• Access to equity will be a nightmare and likely to incur valuation costs if you want to increase one of the loans
• Financing another investment property can be a challenge due to perceived serviceability
• The lender can take advantage, knowing the borrower will unlikely want to go through the hassle of changing banks

Any financial transaction will have its pros and cons, but a wise investor will always consider both!

HOW CAN IT BE AVOIDED?

Whenever possible, insist on stand-alone loans and securities.

Take out separate loans for each new property with the deposit and costs coming from an established line of credit or offset account.
Cross Collateralisation can be removed by the current lender, subject to LVR and product guidelines

For an honest and unbiased opinion, talk to Think and Grow Finance today on 03 8390 5855 or email mitesh@thinkandgrowfinance.com.au