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Cross Collateralised versus Standalone

What is “cross collateralised” security?

Cross collateralisation is the term used to describe when two or more properties are used to secure one or more loans by the same lender. When you have loans cross collateralised, the lender in question is securing the aggregate of all your borrowings with the aggregate of all your security.

If an investor wanted to acquire a property using the cross collateralisation method, they could structure as per the following example.

Say you have a home loan of $400,000 which is secured by your family home worth $800,000. Potentially you could use the equity in your home as additional security and purchase an investment property for say $500,000 while borrowing the entire purchase price and the associated costs such as stamp duty. So say a total loan of $530,000.

In aggregate you would have $930,000 in loans secured by $1,300,000 worth of property. Expressed as a loan to value ratio (LVR) it would be 71% which would be an acceptable level for all lenders.

Family home and new investment property used as security for both loans:

Loan 1:  $400,000 (existing owner occupied home loan)
Loan 2:  $530,000 (new investment loan)
Security: $800,000 + $500,000 (both properties)
LVR: 

$400,000 + $530,000  =   $930,000   =   71%
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$800,000 + $500,000       $1,300,000

What is “stand alone” security?

Having a stand alone security means a loan or loans are secured solely by one property. To use the stand alone method to acquire additional properties, an investor could structure as follows (using the same figures from above).

Family home as stand alone security:   

Loan 1: $400,000 (existing owner occupied home loan)
Loan 2: $130,000 (loan for the new investment property deposit)
Security: $800,000 (Family home solely)
LVR:

 $400,000 + $130,000   =   $530,000  =  66%
----------------------------------------------------
           $800,000               $800,000

Investment property as stand alone security:

Loan 1: $400,000 (new investment loan)
Loan 2: $500,000 (investment property solely)
Security:  
LVR:

$400,000  =  80% 
---------------
$500,000

The funds to complete the purchase ie the difference between the loan ($400,000) and purchase price ($500,000) would come from the $130,000 loan secured against the family home. The costs such as stamp duty would also come from these funds.

Stand Alone or Cross Collateralisation?

When the stand alone structure is the best option

We always recommend that our clients do the stand alone method if possible.  The reason for this is that untangling a series of crossed collateralised properties can be very difficult. It can also mean the borrower loses control of their affairs and can expose them to unnecessary risk.

As an example, say an investor has 5 properties all tied together as security for various loans and decided to sell one of their properties. Lenders can require the following to happen.

  • The other 4 remaining properties would have to be valued to see if the security for the remaining loans will be sufficient. If it wasn’t, the lender can demand all sale proceeds be used to reduce the overall debt. In extreme cases a lender may even not allow the sale to go through.
  • Some lenders require a full reassessment of a borrower’s financial position to see if they can still afford the remaining loans. This can come at an inconvenient time for the borrower. If the remaining loans are not affordable according to the lender, they can as above demand the entire sale proceeds are used to reduce the overall debt level. In extreme cases, if the lender takes the entire sales proceeds and they are still satisfied that the remaining loans fit within their policy, it may trigger a default. In this case a lender could force a borrower to repay all their loans immediately. In practice this would mean having to liquidate their entire property holdings, including possibly the family home, or repay the debt in full by refinancing to another lender (which might not be possible).
  • Most lenders will require new loan and mortgage documents to be issued. While this in itself is no big deal it can be a hassle!

By keeping all properties as stand alone, the investor can sell any property at any time and pay out only the loan or loans secured by that particular property. There is no need to complete a reassessment of your “position” with the lender, and also no need to do valuations on the remaining properties. Importantly, the investor dictates what happens to the net sale proceeds.

Won’t I end up with lots of loans?

Ideally an investor would be able to put in place a line of credit facility secured by the property with the most equity. They would use that for multiple deposits on multiple purchases.

When stand alone is not the best option

Occasionally it is just not practical to have properties structured as “stand alone”. This would occur when an investor didn’t have sufficient equity in single properties to make the required deposit for the next purchase. They may have enough equity in two or more properties, but may not want multiple loans. In that case “crossing” may be the best option.

What are “all monies” mortgages?

“All monies” is the term that refers to the fact that many mortgages do not relate to a specific loan amount advanced, but to all monies owed by a borrower to the lender.

Therefore, even if an investor chooses to use the stand alone method to structure their loans, if all their mortgages are with the same lender they are still exposed to the “all monies” clause if something goes wrong. In fact the lender in question can make a call on any or all of the borrower’s assets. The only way to protect against a lender making a call on a property (even if they don’t hold the mortgage) is if the property in question is mortgaged to another lender. This effectively locks them out.

Spreading your exposure

If you have multiple properties and loans we recommend you have at least 2 main lenders. The reason for this is for risk mitigation purposes. It may be easier to have all your loans with one lender but if you ever get into financial trouble it will be in your favour to have two or more lenders. A good strategy would be to have one lender for your home loan and another for all your investment loans.

Are you an investor who wants an expert broker in your corner?

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Lex Luther Enterprises Pty Ltd (ABN 58114636949) trading as “Mortgage Experts” is an Authorised Credit Representative (444479) of Martin Warren Thomas McDonald, Australian Credit Licence (391230) under s64(1) of the National Consumer Protection Act 2009.