Pro’s And Con’s of Cross Securitisation Or Cross Collaterisation
Cross Securitisation is used to enable a client to purchase another property, using an existing property that they already own. Cross Securitisation has a definite place in the financing toolbox, but would be clients really need to go into with eyes wide open. This is where talking to a Mortgage Broker in Adelaide is advisable. Castle Mortgages are Mortgage Brokers in Adelaide who would be happy to assist. In the meantime, though, I thought I would touch on what Cross-Collaterisation means, and some of the pros and cons.
Cross-Securitisation is where you would two or more properties to secure the loans that you have. To give an example, John has an owner-occupied property and would like to purchase an investment property. John’s Investment property is worth $500000.00 and currently has a loan on it of $350000.00. For simplicity, let us ignore stamp duty on a new purchase and assume John applies for a loan with his same lender to purchase an investment property. The new property costs $600000.00. John offers the lender both his owner-occupied house and the new investment property as security for both loans with his current lender. So if you were to look at the investment loan, the Owner-occupied house would be standing in as well as security there. If you did the same for the Owner-Occupied loan, you would find the Investment property is standing in as security on the Owner-occupied loan as well. This is where the Cross part of the Cross Securitisation comes from. All loans are linked to all properties and vice versa. For Johns Properties above, he now has a total of $950000.00 worth of loans against $1100000.00 worth of properties. John’s total loan to value ratio is 86%. The opposite of having loans Cross-collateralised would be to have them “stand-alone”. In this instance, your would-be client would need a lot of equity in the owner-occupied loan. What they would do is increase the loan of the owner-occupied property for the deposit required plus government charges on the new one. The equity left in the owner-occupied property, as well as the new one, would need to be enough to be acceptable for the lenders not to need more security. Having the loans structured like this means that they can be moved to other lenders independently, or each property could be sold if required without affecting the other property. A stand-alone option does give a greater amount of freedom.
One of the big Cons of structuring your finance by crossing securities, is as discussed above, it can be very constrictive when it comes to freedom of choice and agility with regards to moving loans or selling a property. Let’s use an example that another lender has a very good investment rate for an investment loan, a full 1% cheaper than John’s current rate he is getting on his investment portion now. If John’s loans on each of his properties were stand-alone, he could simply refinance the investment part to the new lender and leave his Owner-occupied loan with his current lender because he was happy with it. With his loans being crossed, he needs to either bring both loans across and accept a maybe inferior rate for the Owner-occupied part to do that. On the other hand, he may not move. Thus he is restricted, and having a cross-collateralised set up has caused him to have perhaps not had the most cost-effective set up that he could have. Another con to having everything crossed is if John decided that he would like to sell one of his properties. If he were to sell the investment property, he would need to apply to the bank to have the property released as security. For the bank to enable this, there would need to be enough equity left in the remaining property to facilitate this. If the remaining equity was not enough, the client will need to pay in cash to get the remaining loan down enough so that the release may happen; otherwise, the lender may refuse to release the property. Off the back of this scenario, the lender will need to have both properties valued again, and this highlights another Con of Cross-collaterisation, cost. You are having to do two valuations every time you want to look at changing or increasing your loans.
As above, there are many negatives to cross-securitising properties; however, as I said before, there are pros too, and there are times and circumstances where it is advantageous. A client purchasing their first investment property, and they need the equity in their Owner-occupied property to purchase the investment is one such circumstance. Many times the equity in the Owner Occupied property is not enough to allow a 20% equity stake in both properties. Not being able to have both properties as stand-alone means that lenders’ mortgage insurance will have to be paid, but because you are Crossing the loans, the purchase is still possible. What often also happens is that because you are presenting to a lender with a large loan size overall, you may quite often get a larger discount on your rate, so a pro for cross-collaterisation. Another benefit for crossing your loans is that the lender’s mortgage insurance premium may often be less for a single loan size as apposed to two loans that are over the threshold. This is not always the case, but often can be.
As you see above, deciding to cross secure or go stand alone is not as straight forward as it may seem, and here as cliched as it may sound, but everyone’s circumstance in this instance will be different. It pays to speak to someone that can help you look at your scenario and give you guidance on what may suit you. It may sound biased, but a Mortgage Broker should be able to look at your scenario in an unbiased manner (having no allegiance to a lender) and give you that guidance. If you are looking for good Mortgage Brokers in Adelaide Castle Mortgages would be the people to get in touch with. If you have any questions or would like to have a chat, give us a call.