Many Investors find themselves faced with a common dilemma: should they secure multiple properties with the same Bank, or spread their investments across different lenders?
There are options, with one being the ability to of cross-securing properties, commonly known as cross-collateralisation. However, there are potential risks associated with it.
By understanding these risks, you can make informed decisions that will maximise your borrowing power and protect your financial future.
This decision is not to be taken lightly, as it can significantly impact your borrowing power and financial flexibility.
Cross-Collateralisation Explained
Cross-collateralisation is when a lender interlinks multiple properties as security for a loan.
In other words, if you have multiple properties secured with the same Bank, they will consider all of them collectively when assessing your borrowing capacity.
This approach provides added security for the lender, as they have a broader range of assets should they need to recover their funds in the event of default.
However, for you the borrower, cross-securing properties can have various negative consequences that should be carefully considered, as per below:
Exposure of Your Family Home
One significant risk of cross-collateralisation is the exposure of your family home to investment debt.
When your family home is cross-secured with your investment properties and you default on your investment loans, your lender has the power to sell your assets, including your family home, to recover the remaining loan amount.
Therefore, your most valuable asset is put at risk, and this can have devastating consequences for you and your family.
To mitigate this risk, you can leverage your equity without the cross-securitisation structure.
By securing your investment property with a different Bank, you can protect your family home from being entangled in your investment debt.
This ensures that your family home remains separate and unaffected in the event of any financial challenges associated with your investment properties.
Exposure to Interest Rate Rises
If you have all your properties with one lender and that lender’s interest rates are higher than those offered by other Banks, you could end up paying significantly more in interest costs. This could have a substantial impact on your cash flow and overall financial stability.
Also, when your loans come off a fixed term and need to be re-fixed, you may not be satisfied with the interest rates offered by your current Bank.
In such cases, switching to another lender can be challenging if you have had a change in your financial circumstances, or there has been a change to the Bank’s policies.
With a lack of flexibility this can potentially result in significant rate increases, putting further strain on your financial situation.
By diversifying your mortgage portfolio, across multiple lenders, you can mitigate this risk. You can then take advantage of competitive interest rates, with the flexibility to switch lenders if necessary, ensuring that you always secure the most favourable terms for your investments.
Loss of Control Over Sale Proceeds
Another significant drawback of cross-securing properties is the potential loss of control over your sale proceeds.
When you decide to sell one of your properties, the lender will review your borrowing capacity and equity levels on the remaining securities.
The lender then has the authority to determine how much you need to repay, leaving you with little to no control over the net sale proceeds.
By having only one property with one lender, you have the advantage of paying off the entire loan and keeping the remaining net sale proceeds. This level of control enables you to make informed financial decisions and maximise returns from your property sales.
Borrowing Capacity Limits
Borrowing capacity limits can be a significant concern when you have multiple properties secured with one lender.
Each lender has different servicing calculation policies for investment properties, which can result in substantial variations in your borrowing capacity.
They also have differing limits on how many properties you can have with them and the total overall lending they are comfortable with.
Multiple Lender Option
By spreading your properties across multiple lenders, you can take advantage of the various lending criteria. Flexibility to choose is key.
For example, some Banks will let you borrow for a small apartment, where others do not.
iLender has substantial experience and knowledge of dealing with these policies to help you achieve the best outcome for your situation.
So although cross-collateralisation may seem like a convenient option for securing multiple properties with one lender, it comes with significant risks that can limit your borrowing power and financial flexibility.
By understanding the risks associated with cross-securing properties, you can make informed decisions that protect your assets and maximise your financial potential.
By working closely with us we can help you diversify your mortgage portfolio across multiple lenders and assist you in navigating the complex landscape of property investment with confidence and achieving your financial goals freely.
So, feel free to reach out if you need a hand, or just to have a chat about this, pick up the phone and call 0800 LENDER (536337) or email to [email protected]
