Cross-collateralisation (also referred to as cross-securitisation) is a term used when a bank will use multiple properties to provide you with one large loan. If you have your existing home loan and an investment loan with the same bank, they will normally use the home you live in as security for the investment loan and at the same time the investment property is used as security for the home loan.
cross-cor.png" style="width: 300px; height: 208px;" />
So why do it?
Cross-collateralisation provides the bank with an increased level of comfort. They now have control over what you do with your investment property and your home. It makes the bank feel safer and hence why this is how they like to structure applicants – to their benefit, not yours.
What’s in it for you?
The assumption may be that if the bank is feeling safer, there must be some benefit for the borrower?
You don’t necessarily get better rates, you don’t get a higher borrowing capacity, the income you need to prove you can repay the loan is still the same, regardless if you decide to cross-collateralise or not. When you apply for a loan directly with a bank, the bank will work for its own best interest and the interest of its shareholders. They are in the business of making money and reducing as much risk along the way. They will try to get you to cross-securitise your properties as they are in control of all of your property, and ultimately it makes them feel safer and in a lower risk position.
As a finance specialist, my interest is with my client, and to structure loans to benefit the needs of our customers, not the bank. My proposal for financing multiple properties is simple. I propose that each property remains independent and has its own individual loan attached to it that is not secured by any other property. When you can borrow additional funds from your first property to use as a deposit for your second property purchase, we simply create a “split” loan. This enables the accountant to easily allocate interest costs to each individual property at tax time.
Conclusion: Banks will want you to cross secure all properties together as it reduces their overall risk, not for your interest or benefit.
For further information contact:
Pietro Sciotto Dip FMBM
Barry Plant Financial Services PO Box 547, Ivanhoe VIC 3089
0427 700 750