What all property investors should know about cross collateralisation

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Cross-collateralisation is an important loan structuring issue of which many property investors are not aware.

Knowing the implications of cross-collateralisation is crucial to developing a long-term property investment portfolio.

What is cross-collateralisation?

Cross-collateralisation occurs when more than one property is used to secure a loan or multiple loans.

For example, a person owns Property A and wants to purchase Property B without using any of their own funds.Сross-collateralisation Stratergy

The bank can use both properties as collateral for the new loan.

Many investors have cross-collateralized loans without knowing it.

One way to determine if loans are cross-collateralized or not (stand-alone) is by checking the detail in the loan contract.

There will be a section in the body of the contract which will note the addresses of the properties over which the lender holds or will register its mortgage.

Cross-collateralisation may often seem to be an appealing option to an investor, but it puts banks in a stronger position as it provides them with greater control over the properties.

There may be a benefit initially to the investor in that he or she has not had to use their own cash to acquire the second property; however, this strategy does have the potential to negatively impact future investment opportunities.

There are several important issues to consider:

1. Loss of Flexibility

If a property portfolio is cross-collateralized it can limit severely the way in which sale proceeds may be used.

For example, if a property is sold, the bank might require that the sale proceeds are used to reduce other loans in that portfolio, to keep the Loan to Valuation Ratio (LVR) within a certain level.

In that case, the loan proceeds would not be able to be used at the investor’s discretion.

2. Increased Complexity

It is often the case that every property in a cross-collateralized portfolio needs to be re-valued whenever one property is released.

There may be significant costs associated with valuing each property, especially if the portfolio is not within a loan package product.

The valuations are undertaken in order for the bank to determine its exposure with the remaining properties.

In addition, there is documentation to be executed every time a portfolio is changed.

This paperwork is known as a Variation of Security.

3. Limited Product Choice

In general, most property investors favor Interest Only loans.

As an investor’s exposure increases with any one lender, that lender can restrict future loans to only Principal and Interest.

Regardless of one’s asset position, many banks will want to control the type of loan that they will make available to an investor when his or her aggregate debt with them is high.

It can often be a better strategy for a smart investor to use multiple lenders and therefore gain access to the most suitable loan products.

4. Changing Lenders can be Difficult and Costly  Changing Lenders can be Difficult and Costly

When a loan(s) is secured by multiple properties, the establishment fees are usually higher as they include charges for ‘additional’ security.

This cost can be compounded when an investor wishes to move those cross-collateralized properties from one lender to another.

Exit fees can be significant, especially if any of the loans are fixed.

In addition, new valuations may be required (as explained above) where the investor wishes to release property.

5. Equity Access

If one property in the portfolio has enjoyed a capital gain and the others have dropped in value, the net effect on the total value may be zero.

The equity in the property that increased in value is inaccessible to the investor because overall the equity in the portfolio didn’t increase.

This can have serious consequences. For example, it could mean that an investor does not have ready access to cash and may miss valuable investment opportunities.

If the loans were not cross-collateralized, an application to increase the loan or credit limit against the property that increased in value would be a relatively simple process.

How can cross-collateralisation be avoided?Equity Access

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.

While I know a bit about finance and how it relates to property, you should always seek the opinion of a proficient finance broker who can provide assistance with refinancing or restructuring loans to avoid the potential shortcomings of cross-collateralization.

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Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and one of Australia's 50 most influential Thought Leaders. His opinions are regularly featured in the media. Visit Metropole.com.au


'What all property investors should know about cross collateralisation' have 35 comments

    Avatar for Michael Yardney

    September 15, 2021 Tim

    Hi Michael, If I want to buy an investment property paying no cash of my own and don’t want to cross collateralize, will the following offer from our existing bank achieving this:

    2 new loans to fund the investment property:
    One loan for 80% secured by the Investment itself only
    One loan for 20% plus costs secured by my home only

    Let me know if you see any issues with this… Thanks!

    Reply

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    October 4, 2020 Linda Schmidt

    can a bank refinance four securities and then remove one security and give it to another lender. What is the legal requirements for this sort of transaction ie is it legal?

    Reply

      October 5, 2020 Michael Yardney

      I’ve never heard of this happening Linda – who are the lenders involved?

      Reply

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        October 25, 2020 Linda Schmidt

        P&N bank refinanced Westpac taking four securities – 1 was the owner occupier (that I am fighting about now) the others investment securities. P&N then passed #4 G B to ME bank to use to purchase another property. Question is Can the banks interechange these properties? what regulations or documents are required to permit this swapping? What are the reules about unaffordability when it is applied to the fact that P&N did not have the return on the remaining securities to repay the loan when the interest rate is lower? marginally I am pretty much in penury with nothing left and about to lose my home. have no funds to pay lawyers.

        Reply

          October 25, 2020 Michael Yardney

          Linda – I’m sorry to hear of your problems. Clearly I can’t give you legal advice in this forum. I’m not qualified to do so and there consequences are too important.
          Have you approached the banking ombudsman?

          Reply

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      October 25, 2020 Linda Schmidt

      B bank refinanced four securities from A bank Three of these were investments. The other was the Owner occupier. the amount repaid was $923000 to A the loan from B was $940000. One of the securities 4 goodchild bellevue 6056 was transferred to C bank to enable finance for a new property. In this transaction all the loans were unaffordable(AFCA)
      What is the legal requirement /document that allows B Bank to hand one security from the group they refinanced, to C bank. I need to have B and C lenders investigated collectively and need to know the rules that have been breached are you able to call me – contact me? via email.

      Reply

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      October 25, 2020 Linda Schmidt

      Can I mention the actual lenders here – is it a breach of privacy? if not P&N and ME banks

      Reply

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    May 11, 2020 Bobby

    Hi Michael
    Good explanation on cross collateralisation. Unfortunately i have ended up in that situation. My primary residence was used to fund for the cost portion of my investment property purchase (land and build). The other components of the investment loan (land and construction) have only got the investment property listed in the contract. All 3 loans had different interest options (one was fixed, the other was P&I and one was interest only). I am in the process of moving them all to interest only and dealing with the bank directly as i got the loans directly from the bank. The bank has just approved the interest only loan and merged all the 3 loans into one with my primary residence and investment property listed in the contract. Unfortunately my investment property value is 8% lower than purchase price and i ended up utilising equity from principle home to fund for the deposit (not through line of credit).
    Question – do i ask the bank to split up the new contract so that only 15% of the investment property loan is crossed with my primary property like it was before. Or will that not matter given it is already crossed (even if 15%)? Or do i just go ahead and consolidate the entire loan into interest only for now and refinance in a few months to undo the cross-collateralisation? The current bank will not agree to undo it.

    Reply

      May 11, 2020 Michael Yardney

      Bobby, my advice to you would be not to go to your bank but uses proficient finance broker to help you through the maze. They can even help you work with your current bank to restructure the loan, or they may suggest you refinance elsewhere. The banks are not likely to help you directly.

      Reply

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    April 16, 2019 Ann

    Hi Michael, I have 2 loans (total 600k). Ratio 50/50 for fixed (not expired in another year) and variable. Both are cross-collateralised againts two of my properties (home and invest). Now, I want to sell my home and get another one. Would you be able to shed some lights of what costs I should expect? Preferably, I would like to avoid LMI and retain the max loan amount

    Reply

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    November 15, 2018 Chou

    Hi, I have 2 investment properties, each has one loan. If I restructure the loans, i.e. increase the loan from 1 property and put on the other one to reduce the second loan, will I still get full tax deductable on both loans (interest) afterward?

    Reply

      November 15, 2018 Michael Yardney

      If the purpose for your loans is for investment purposes and not personal loans the interest and costs should be tax deductible

      Reply

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    August 8, 2018 Rob

    Hi Michael, at the end of June I set up two interest in advance loans with the NAB for two investment properties I own. On the loan paper work in the security section, each loan only just listed the one property as security.

    I am about to sign up for another two interest only in arrears loans also with the NAB for another two investment properties I have. Again each of these loans only mentions one property as security.

    In Summary I have four investment properties all financed with four loans through the NAB. Each loan document only lists the one property as security. I assume this means I am NOT cross securitised as each loan only lists one property as security.

    Am I correct in this understanding, even though all the loans are with the NAB?

    Thanks Rob

    Reply

      August 8, 2018 Michael Yardney

      Rob – from what you tell me it sound like you are NOT cross securitised – that’s good – but best to check and ask the bank

      Reply

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    May 15, 2018 Ben

    I’m told if I cross-collateral my loan now having paid off my owner occupied house I’ll receive owner occupied rates which are very attractive. If I’m looking to hold this property long term and the LVR of the investment property is around 90% at present. Only around 5% of equity from principle residence is necessary to reduce LVR to 70%. What are the biggest cons for me? I’m looking at the pros of .5% rate reduction

    Reply

      May 15, 2018 Michael Yardney

      Ben
      It’s not right to give you persoanl advice in this forum without knowing your full situation. I understand the enticement of low rates – you need a proficient finance strategist to advise you on your personal situation – you won’t get that from a bank

      Reply

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    March 28, 2018 Erika

    If I lend against a real-estate property (First Deed of Trust) and cross-collateralized my First Deed of Trust with another property that already had a First Deed of Trust and the borrower is in Default with their Deed of Trust, does that mean my property is in default too? If it goes for sale at the Trustee Sale will my property be part of that transaction?

    Reply

      March 28, 2018 Michael Yardney

      Erika
      My knowledge is about the Australian property market – where are you based – is this a USA loan you’re talking about?

      Reply

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    March 12, 2018 Chris

    Hey Michael,
    I have 2 properties cross collateralised. One is doing well, loan is 200k, value is 500k. The other is in a mining town and has rapidly gone downhill- Loan and purchase price was 500k, current value is 100k.
    Is there any options you would recommend? Is bankruptcy an option worth considering?
    Cheers,
    Chris

    Reply

      March 12, 2018 Michael Yardney

      Chris – the mining town property is a real problem isn’t it. It will probably never reach it’s original price in your lifetime and will hold you back for years to come
      Bankruptcy has very serious long term consequences and is definitely not an easy way out.
      You may just have to ride it out until you have enough cash saved or equity in your second property to liquidate both and get rid of your debts and start all over again.
      I’m sorry to hear of your plight

      Reply

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    October 11, 2017 Fran

    Hi Michael, We attended a free property seminar and it told us not to cross-collaterise our properties but it was discussed on a higher level. Thank you for a very detailed explanation. It is more clear now what the disadvantages are. However, I have a question for you. We do not have property yet and planning to acquire a land first – either 1 land that can be subdivided into 2 or 2 separate lands that are next to each other. So if we take out a loan in Bank #1, and leave the land for say a year, and take out the equity for the land to fund the building of our house to be our PPR then wait for it for maybe 2 or 3 yrs and get the equity of the entire Land#1 with House#1 to fund the building of House#2 in Land#2, can we have a different bank for loan for House#2? House# 2 will be rented out.

    This is if the land is 2 separate titles:
    Scenario 1:
    Bank#1 : Land#1 + Land#2 -> equity release -> House#1
    Bank#2: equity release from Land#1 + Land#2 -> House#2

    Scenario 2:
    Bank#1 : Land#1 -> equity release -> House#1
    Bank#2: Land#2 -> equity release -> House#2

    Reply

      October 11, 2017 Michael Yardney

      Fran – I’m not very clear on your question but you can’t have 2 banks having loans over the one property

      Reply

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    September 21, 2017 shirley

    very interesting article, although too late for me now, we have just found out that our home is cross collatered with our investment property. we are just about to sell our home with the intention og buying ourselves another one to live in, and our broker says we will have difficulty because of this. feeling quite angry & confused now

    Reply

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    January 22, 2017 Tony

    Very Good Article – will be bookmarking your site 🙂 Cheers

    Reply

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    January 16, 2017 nish

    Hi Michael, I really didnt understand the meaning of cross collateralisation. Do you mean here that one should not use the equity from one property to purchase another property. In that case how would one grow portfolio??? My finance broker is advising to use equity from my wife’s first property to fund my first IP.

    Thanks

    Reply

      January 17, 2017 Michael Yardney

      Nish. It’s common practice to use the equity from one property as the d deposit for the next one. But dont allow the bank to “cross collateralise” or link this equity release loan with your second loan, the one used to purchase the investment property.

      Reply

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    September 29, 2016 tim

    If i do not cross collateral a loan for an investment property wont i have to use around $120000 20% deposit from equity in my own home? which will not be a tax advantage like borrowing the whole amount for the investment?

    Reply

      September 29, 2016 Michael Yardney

      Kim, there is a big difference between using your existing property as a security for a new purchase (so you don’t have to come up with a deposit) and having two separate loans in the process and the strategy we are suggesting you don’t employ – which is cross collateralise in those two loans

      Reply

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        December 10, 2019 Andrew

        Hi Michael,
        Can you clarify this further: “there is a big difference between using your existing property as a security for a new purchase (so you don’t have to come up with a deposit) and having two separate loans in the process ..– which is cross collateralise in those two loans”. Would some lenders allow you to somehow put up your existing house as a security and lend you the full amount, but without this being cross collateralization? Isn’t putting up your house as security the same thing? Or can they do this without being recorded as having a mortgage over your house? Thank you!

        Reply

          December 11, 2019 Michael Yardney

          Andrew – yes you can have 2 loans from the same bank which are NOT cross securitised

          Reply

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    August 15, 2016 Susan

    Is not Cross-collateralisation better from tax perspective?

    Reply

      August 15, 2016 Michael Yardney

      Susan
      There is no tax benefit in cross collateralising a loan. A loan is tax deductible if it used for a business purpose or to create income

      Reply

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    July 15, 2016 Alex

    Thanks Michael, this is exactly what my lender is suggesting. And I know what to answer and why.

    Reply


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