Useful Tips

Cross Collateralisation

Every lender has their own terms and conditions, and this is intended only as a general guide to understanding this topic. Contact us to discuss your individual circumstances.

Definition
When you borrow money to buy a property, the lender will take a mortgage over that property to secure the loan – one loan and one security property.

As you increase your property portfolio you can keep each new loan and new property separate, or you can cross-collateralise the securities. Cross collateralising is where all properties jointly secure all loans. The same lender will hold first mortgage over all properties.

Benefits
Simplified single loan access to any overall increase in equity for other uses e.g. to use towards your next property. If the securities & loans are separate then accessing equity is by means of a new or increased loan for each single property.
Higher total loans with a single lender can put you in a stronger position to negotiate to lower interest rates.
If you don’t cross-collateralise, you will end up with more individual loans which can increase your upfront & ongoing fees.
Spreading your loans over multiple lenders could reduce your maximum borrowing capacity.

Disadvantages
All properties & loans tied up and interlinked with single lender.
If you sell a single property, then the lender could dictate where the sale proceeds are directed.
If one of the properties decreases in value, you may not be able to access equity in others that have increased.
If you want to move some of your loans to another lender, it can be very difficult to unravel the cross-collateralisation.
If you default on loan repayments, the bank may be able to put their choice of properties on the market to recover the debts owing.

Things to consider
You do not have to re-finance from your existing lender to unwind any previous cross-collateralisation. It may just mean restructuring your loans with your existing lender.

If your loans have been cross-collateralised for some time, you may have enough equity in each individual property to overcome most of the disadvantages. It is more likely to cause issues in the early stages of building your property portfolio when your equity is lower.