There are a number of reasons why crossing your properties will put you in a less than ideal situation. Unfortunately, many of these issues won’t become apparent until long after the loan contract has been signed, which is why it is so important to ensure good loan structuring from the start.
Risk 1: you may not have access to your equity upon sale of a security
Imagine you have 2 properties that are crossed, purchased 10 years ago. 1 of these properties has doubled in value and you think it’s the right time to sell. The sale should put a lot of money in your pocket because the asset has risen significantly in value.
But guess what? You may never see these funds if your loans are crossed! As the bank holds multiple securities against the loan, it can decide that all the profits from the sale should be used to pay down your remaining loan to improve their position. Because of the way your loans are structured, the bank has the first call on the funds, not you.
If the other property has had a drop in property value, than the bank will actually withhold the funds from the sale and ensure their position remains strong.
This is a great example of how incorrect loan structuring can put you in a weaker position and something that comes as a shock to a lot of people who don’t even know their loans are crossed.
Risk 2: You may not be able to access equity as your asset values rise
The above problem also applies to situations where you are looking to release equity in your property without selling. This is often of more concern to property investors as releasing equity in your portfolio is a key tool to continue growing.
Let’s take the same scenario but say rather than selling, you want to get a new valuation on the property that’s risen and release this equity as new borrowing.
When the valuation comes back and the equity is there, the bank can refuse to release this equity because it wants too sure up its position against BOTH securities.
Again because of the way your loans are structured the bank is free to take this approach and there is very little you can do about it. If you had separate loans, the bank can only consider the lending implications of that 1 security, giving them less reasons to say no.
Risk 3: You are in a weaker positon to seek or extend favourable loan terms
This is another problem that can occur when the bank wants to reduce your exposure across multiple securities. Let’s say you have 2 properties crossed, both on interest-only terms. When one of these terms expires, the bank may refuse to extend your interest only period on the basis it wants see you paying back interest across the 2 properties. Had you have split the loans up, the bank would only be accessing the interest only request against the 1 security it pertains too, increasing your chances of extending your favourable loan terms.
Risk 4: It’s much harder to refinance out of cross collateralised loans
Given Risk 1 above, it can be difficult to refinance out just 1 security. Often this means you will need to refinance out both securities to rectify your loan structure. This can create unnecessary paperwork and refinance costs that could have been avoided if the loan was structure correctly to start with. That said, it is often better to go through the annoyance or refinancing out to make sure you get your structure right. Going forward you want to be in as much control as possible of your assets.
Risk 5: Cross collateralisation may mean a higher LMI fee than required
Cross collateralisation is most dangerous at high LVRs, as the above risks are more likely to effect you in these cases.
When in LMI territory, having cross securitised loans may mean a higher LMI fee. This is because the LMI fee ‘scales’ up depending on the value of the property and the loan size. If your loans are cross collateralised, there are multiple securities involved, meaning the value of assets is higher. Hence the LMI fee is often higher with cross securitised loans. This is unnecessary.
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