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Should I Cross Collateralise in 2022?


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Natalie Tan

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Real estate investments continue to rise in 2022, despite recent interest rate rises and higher than expected inflation. Real estate investments are still a very strong path to financial success, and some people are looking to cross collateralise in order to take advantage of the steady growth market.

When you’re starting out as a real estate investor, you may need some help affording your first investments.

One option is to cross collateralise your current properties or other assets you own. However, this isn’t a choice to make lightly.

A lot goes into considering cross collateralising for a loan. We’ve put together this list of tips on how to cross collateralise to help you make the right decision for your investments.

How to Cross Collateralise

Although it sounds complex, cross collateralisation is when you use more than one property to secure one or more loans.

In other words, if you currently own a property, you can use the properties you own as collateral for a new loan to purchase another property.

In essence, you are agreeing that your lender or bank can take your property and sell it if you don’t pay back the loan.

You can use collateral to pay the down payment on a house. Usually, the downpayment is 20% of the total home loan. You can use your current assets, including stocks, other property, and gold to pay for it.

Cross-collateralisation seems like a great option to invest in more properties. However, keep in mind that it gives your bank a lot of control over your properties.

Even though you won’t have to use cash upfront to purchase more properties, it can become an issue in future investment opportunities.

Do You Already Have Cross-Collateralised Loans?

Some investors have a cross collateralised loan and don’t know it! You can see if that is the case for you by checking the details of your loan contract.

There is a section in the body of the contract that shows the addresses of your other properties which the lender holds or registers its mortgage.

What You Need to Know

Before you choose cross collateralising your property, there are some things to consider. This ensures that you make the right decision for the long-term of your investment strategy.

1. Limited Control

Once you choose to cross collateralise your property portfolio, you give up complete control over your sale proceeds. This is because the bank gets to decide where the proceeds of a sale go.

The bank might decide that the money from your property sale should be used to reduce other loans in your portfolio. This is usually to keep the LVR (Loan to Valuation ratio) at a certain level.

A Loan to Value ratio is used when applying for a loan. This is the amount that you can borrow against your asset. If your home is worth $200,000 and the lender allows an LTV up to 80%, you can borrow up to $160,000.

2. You Must Re-Value Your Portfolio Often

Usually, with a cross collateralised portfolio, you need to re-value every property when one property is released. The costs of re-valuing can add up quickly. 

This is especially true for a portfolio not in a loan package product. Your bank wants to track the value of your remaining properties to mitigate its exposure.

Paperwork, known as a Variation of Security, is completed every time your portfolio changes. This can be time-consuming and costly.

3. Loans Are Restricted

For investors that have high debt, banks can restrict future loans to only principal and interest loans. 

This is the case even if you have a lot of assets.

Most property investors prefer interest-only loans where you solely make interest payments for the first set number of years. For this reason, it could benefit you to use many different lenders and choose for yourself the best loan options.

4. Locked Into Fees

Once you use your multiple properties to secure a loan, you might also get locked into lenders’ fees. These can be higher than normal because they include charges for things like added security.

Then, if you try to move your cross collateralised properties to a different lender, the exit fees are very high. Even more so if the loans are fixed

5. Value of Equity Could Drop

When you cross collateralise your properties, your portfolio could drop to zero if some properties drop in value.

Even if you have capital gains from one of your properties. The net value could still be zero because other properties might lose money. 

This is because even though the equity in one property increased, the overall value of your portfolio didn’t.

You might also be required to provide more collateral if your current collateral loses value. 

6. Assets Worth Less

Be prepared for lenders to value your pledged asset much lower than expected. In some cases, a lender might only value 50% of your investment portfolio. 

This is how they protect themselves from greater losses if the value of your portfolio drops. 

You are always required to pay the amount of your loan. If the bank sells your property as collateral for less than the total amount of the loan, you still owe the difference.

If you don’t pay the difference, your lender can bring legal action against you.

Should I Cross-Collateralise?

If you need a loan for a property, cross collateralisation improves your chances of getting approved for large loans. There’s also more of a chance of getting a good rate because your collateral means less risk for the lender.

A cross collateralisation might be the right choice for you if you know you can make the payments on your loan. Failing to make payments on cross collateralisation could mean losing your assets.

For some, the risk of missing payments isn’t worth it. However, keep in mind that lenders prefer you repay the loans rather than bring legal action against you. 

Therefore, they only go through the hassle of taking collateral, such as your home or car, as a last resort.

Get Expert Help!

There are a lot of risks involved in cross collateralising your assets for real estate investments. If you are wondering if you should cross collateralise your property, then your next best step is to reach out for expert advice.

We can help you through the step-by-step process of getting a loan and answer any questions you have. Make your dream property investment a reality. Contact us today!

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