If you own more than one property (or want to) then this is a must read

Do you own more than one property and borrowing more money just seems much more difficult all of a sudden? If this is you, then you have probably been "cross-collateralised"!

Cross-collateralisation occurs when more than one property is used to secure a loan or multiple loans. To illustrate, a person owns Property 1 and wants to purchase Property 2 without using any of their own funds. The bank takes security over both properties as collateral for the new loan.

I often come across investors who have cross-collateralised loans without even knowing it, and there lies the problem. Borrowing more money has just become more difficult all of a sudden!

One way to determine if your loans are cross-collateralised is by checking the detail in the loan contract. There will be a section in the body of the contract which will note the addresses of the properties over which the lender holds security over the mortgage.

Cross-collateralisation may often seem to be an appealing option to an investor, but it puts banks in a much stronger position as it provides them with greater control over all your properties. Some (novice) Advisors will tell you there are benefits to investors in that he or she has not had to use their own cash to acquire the second property; however this strategy does have the potential to negatively impact future investment opportunities and stop you in your tracks from purchasing more investment properties.

Here are 10 reasons why I think you should stay clear of cross-collateralising your properties and always finance them on a stand-alone basis:

#1. When you sell a property in a cross-collateralised structure you may not see any of the funds as the bank may request some or all of it to go back in against the existing loans to strengthen their position. They don’t need your permission either.

#2. When you sell a property you have to re-sign all of the existing mortgages. Extra unnecessary paperwork.

#3. You can lose product selection and control by being with just the one bank. For example the bank can say no more interest only loans for you. This is quite common when your borrowing levels are high with the one lender.

# 4. Bank holds far more security than often necessary.

#5. Having at least two lenders gives you the flexibility of playing one off against the other, giving you more choice an ultimately more control.

#6. If you want to realise some increased equity when properties have grown in value you need to have your whole portfolio revalued (multiple valuations instead of one, again an additional and unnecessary cost).

#7. You can run out of borrowing capacity with one lender when you reach their maximum serviceability / exposure levels.

#8. It is so much harder to move banks, if you no longer like or agree with their service or lack of.

#9. If you have cash flow problems, your whole portfolio is at risk.

#10. Your “relationship manager” or “private banker” is likely to move jobs (soon) and you are now left with another new person to get to know you, and for you to get to know and trust them.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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