Like many things in finance, cross-collateralisation is simpler than it sounds. Going into it without understanding still isn't a good idea though, so read on for the potential dangers, benefits and alternatives to cross-collateral loans.

    What is cross-collateralisation?

    Cross-collateralisation, or cross-securitisation, means using two or more properties as security on a home loan.

    Once your loan to value ratio (LVR) on one home loan is substantially below 80%, lenders may allow you to access some of your equity to use as a deposit for a loan on another property. This can be a lot quicker and easier than saving up a deposit. If you cross-collaterise, you may be able to use the initial property (often your home) as additional security for your next home loan, which can reduce your LVR.

    Here’s a simplified example: Your home is worth $800,000 and you’ve paid off your mortgage, hence you have $800,000 in equity. You decide you want to buy a $400,000 investment property but you don’t have the cash for a 20% deposit. So you go to a lender and ask to use your home as the security for a $400,000 loan to buy the $400,000 investment property. If approved, this means that this one loan is secured by two properties worth a combined $1.2 million, putting the lender in a very safe position with an LVR of 33.33%.

    What are the benefits of cross-collateralisation?

    Cross-collateralisation benefits can include:

    • Easy equity: Unlocking the equity in the home you live in lets you skip the painstaking process of saving up for another deposit for a loan and quickly jump on an investment opportunity. Cross-collateralisation can make this easier.

    • Potentially lower interest rates: Lenders may be more inclined to offer you a lower interest rate on a cross-collateralised loan because of the additional security and lower LVR. Over the life of the loan this could save you thousands.

    • Convenience: As you can generally only cross-collateralise with one lender, all of your loans are with the same financial institution. This can make your portfolio much easier to manage, rather than having several loans across different lenders, while you might also save on fees.

    Downsides to cross-collateralisation

    There can also be several drawbacks to cross-collaterising:

    • Less control: While having all of your loans with one lender may make things more manageable, it can also mean handing some control of your properties over to your lender. You might need to get approval before you sell, and refinancing can become significantly more complicated.

    • Higher risk of losing your home: Including your home in your cross-collateralised property portfolio could put it at greater risk. Since it’s being used as security for one or two other properties, the lender could have just as much right to force the sale of your owner-occupied house as the investment properties in the portfolio.

    • Restrictions: Another drawback of having all of your loans with one lender is the restrictions that may apply to you. Lenders could restrict the types of loans you can apply for, such as limiting you to principal and interest loans - a problem for investors who sometimes prefer interest-only loans.

    • Difficulty refinancing: Cross-collaterisation can make it more difficult to refinance. The costs of refinancing are also likely to be higher.

    Stand-alone security vs cross-collateralisation

    Stand-alone security means using one property as security for one home loan, typically the home you’re purchasing - the traditional way to buy property.

    You can still use equity to purchase an investment property via the stand-alone security method. For example, if you had an $800,000 with a $400,000 home loan on it you would have $400,000 equity in the home. If you then wanted to buy a $150,000 investment property, you could refinance the loan on the home to release $30,000 of equity to use as a 20% deposit for a separate loan to purchase the investment property. Two separate loans for two separate properties.

    Because of the aforementioned complications associated with cross-collateralisation, many property investors choose stand-alone security option when buying an investment home. It can give you greater control over your portfolio and where funds are directed following the sale of a property.

    Savings.com.au’s two cents

    Cross-collaterisation might help you build a property portfolio quicker and cheaper. It can also be much riskier and give yourself several extra headaches compared to keeping one securitised property per loan. It's probably not something you should explore without knowing what you're doing, so consulting a professional is usually a good idea before you do anything.