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Despite all the ‘so called’ benefits of ‘crossed collateralisation’, given the nature of the ‘property investing game’, I strongly advocate against it, and recommend that you set up all your properties as stand-alone structures via different lenders.
The term ‘Crossed collateralisation’ refers to a scenario where one lender secures one loan against two or more assets, or properties. The most common scenario being an owner occupier buying their first investment property by allowing the bank to ‘crossed collateralise’ their Primary Place of Residence (PPR) with their first investment property.
Many borrowers believe that each of their loans are individually secured, or are structured as a ‘stand-alone’, however, this may not be the case! As sure way to find out if your property portfolio is ‘crossed collateralised’ is to read the mortgage document, specifically paying close attention to the addresses of the assets mentioned in the document. Naturally, if the security asset only mentions one address then the loan is secured only against that asset or property. In the event that the asset and security section nominates more than one property…you guessed it, your properties are ‘crossed collateralised’.
There are several disadvantages of ‘crossed collateralisation’, which for me are all ‘deal breakers’; hence, I personally do not have any investment properties ‘crossed collateralised, and when I was working in banking and later running a mortgage broking company I would always steer people away from this option.
Before I illustrate the main reason why it’s not a good idea to allow lenders to crossed collateralise let me highlight that from the onset, the banks will do their very best to link all your assets via one as it lowers their internal risk. This is because they ultimately control all your eggs and the basket. You will also find that when you allow the banks to crossed collateralise your investment property, the interest rate will be very competitive, especially if your PPR has a lot of equity, and the paperwork and loan application seems to go through without any major hassles.
The problems associated with crossed collateralised properties start becoming apparent when you try to sell or renovate one of your investment properties or your PPR, or attempt to draw down equity in order to buy an investment property via another lender.
One of the most important aspects of allowing lenders to crossed collateralise your entire property portfolio is to appreciate that in the event that you do something to ‘one’ property, the lender will need to value all the ‘other’ properties at the same time that make up the balance of the assets which are secured by the one loan.
I the event that you have some properties that have lost value or are simply located in a market experiencing the lower part of the growth cycle, you might not be able to access any equity form your other properties that are actually doing well. This can also be these case in the event that you sell one of your investment properties and find that you cannot access your proceeds in the event that another investment property has plummeted in value, e.g. mining towns.
Bottom line, crossed collateralised properties are a nuisance at best and can be extremely inconvenient and in some cases even detrimental for property investors wanting to expand their property portfolio, both from a ‘timing perspective’ and a ‘serviceability perspective’.