How do you find out if your loans are crossed and how do you uncross them?
Many people who have cross collateralised loans don’t even know it!
Cross collateralisation is set up in the loan contracts. As we discussed, banks look to slip this in where they can so it is often not sign-posted clearly or put in bold letters.
So to find out if your loan is cross collateralised you can either re-read a copy of your loan contract if you have it and check how many properties are listed as security, or just ring you bank and ask the question.
Another sign that your loans may be cross collateralised is if some of your loans are larger than the value of an individual property. That is, you have a $400,000 loan on a property purchased for $350,000.
Note, you can still have multiple loans with one bank and avoid cross collateralisation.
How to remove cross collateralisation?
If you’ve established you’re your loan is crossed, you have a couple of refinancing options to get out of it:
- Internal refinance. You can submit an application with your current bank to adjust your loan structure to ensure each loan is secured by one property only. Your ability to do this will be based on your ability to service your existing debt and your overall LVR. If you can demonstrate borrowing capacity and your LVR is below 80% this should be a live option to consider. The end result is that you fix your loan structure and stay with your existing bank, often a favourable outcome if you are just looking to uncross in isolation.
- External refinance of 1 properties. This one can be difficult as involves changing your existing loan structure by removing 1 of the security from your existing loan. Again, your ability to do this will be based on your borrowing capacity and LVR. The end result is you will have 2 stand-alone loans, one with your existing bank and 1 with a new lender.
- External refinance of both properties. This option is a little cleaner as it you are effectively paying out your total loan and releasing both securities. You will then take these properties to a new lender and set up the loans separately so they have the correct structure.