Cross Collateralisation – Yes or No?

Quite often, if you go direct to a bank branch for borrowing, you’ll be auto-piloted towards cross-collateralisation of your property loans, but it’s not necessarily a smart manoeuvre.

Basically, cross-collateralisation is like putting all the values of your properties into one big bucket. The total value is then used to secure loans. The other option and the one I would recommend in most cases is the standalone option. This means one of your properties secures one or more new loans. Each loan has only one property it is secured by.

It’s easy to understand why banks are so eager to cross collateralise your property loans, because it means you’re even more in bed with them than you were before. This makes it harder for you to leave and refinance elsewhere. It makes you more ‘sticky’ to that particular lender. But it also makes you less flexible when selling and can cost you more over the long term.

I would recommend standalone whenever you can, simply because it can potentially save you in the long run and provide greater flexibility in life.

For example, if your property loans are set up as standalone and you sell one for $400,000 with $320,000 of this amount being profit, then you can do whatever you want with the proceeds of this sale. You can re-invest or spend that profit as you wish.

However, if your properties are cross-collateralised then the same profits wouldn’t be profits but simply equity added to the bucket, to help pay down the overall loan. Some banks control the funds at settlement. In some circumstances, you may be left with nothing in your hand. This could effectively be an opportunity cost for you, leaving you with less flexibility to buy the next property.

Not cross-collateralising loans means you have more control over your money and that's what we want.

It really does pay to come see me for advice!

Caroline

#homeloanexpert