April 28, 2018 by Paddy O'Sullivan
Choosing the right investment loan and having it structured correctly is as important as choosing the right property.
What is cross collateralisation and why should it be avoided?
Cross collateralisation involves having more then secured against the same home loans. This is the traditional approach that often happens when clients deal directly with their financial institution. When propertys are cross collateralised the values of both are interlinked.
Property is a great long term investment. However like all assets of investment there are peaks and troughs.
If loans on property A and B are cross collateralised and property A increases in value and property B decreases in value 1your overall equity position is neutral.
However, if the properties are stand alone and the lending is secured by each of the properties the decrease in value of property B doesn't affect property A. This means if you need want to use the equity in property A you can and your not restricted.
Back in 2012 Kate and I purchased an owner occupied property in Singleton during the high days of the mining boom. In 2014 we purchased a property in Nowra, relocated from Singleton and turned our Singleton Property into an investment property.
By the time 2016 came the Nowra property had increased in value quite substantially whilst Singleton had headed South. Lucky for us, we had insisted that our properties were stand alone securities. When it came to using some of our Nowra properties equity to start our own business we could and we wern't effected by the decrease in value of our Singleton security.
If both our properties were cross collateralised there is every chance I would be selling mechanical seals into the mining industry or working as a process engineer as opposed to being an award winning Mortgage Broker.
Another issue with Cross collateralised is whenever a property is released the proprty needs to be revalued. This can cause problems when selling the property as the bank can demand that the client pay down other loans in the portfolio. If the properties are stand alone then the borrower has use of the funds.
At Mortgage Choice in Nowra we are investment savy and specialise in ensuring your investment loans are structured properly to allow you to continue to grow your portfolio.