5. Understand cross-collateralisation
If you’re only buying your first property, then you can skip ahead on this… for now. However, if you already have one property and are buying your second or third (even if one of those properties is your PPOR), then it pays to understand cross-collateralisation.
Cross-collateralisation is the simple way of using equity in one property as the deposit for another, which essentially means financing multiple properties with one lender. It’s not impossible to have multiple properties with one lender and not cross-collateralise, however that’s a little tricky so let’s save that for another day and just assume that two or more properties with the same lender will create cross-collateralisation.
UPSIDES AND DOWNSIDES OF CROSS – COLLATERISATION
For some investors, cross-collateralisation is good, for others okay and for some, a nightmare.
Advantages of being with one lender:
- Upfront and ongoing fees are likely to be lower.
- Time taken to get an application for a new property will be less.
- Discounts are likely to be higher.
- Management and moving deposits and redraws between accounts is simpler and faster as everything is in the one spot.
- You are a “bigger” customer and therefore should have better on your deals, however that really comes down to your ability or your advisers ability to negotiate coupled with the size, attitude and mood of your lender. In other words, mark this advantage as a definite maybe.
Disadvantages:
- You extend the power of your lender over you and your decisions.
- Adding or removing one property affects your whole portfolio.
- The financial health of one property can affect your whole portfolio.
- One small change, like selling, can trigger multiple valuations and with that, multiple valuation fees.
In a nutshell, if you are an investor that makes fairly frequent changes to your property portfolio (ie flipper), or your properties are either a mix of high-risk / low-risk assets, or high-growth/low-growth assets, then you really ought to think carefully before cross-collateralising as the disadvantages probably outweigh the advantages.
It might be a little extra work and it might wind up costing you a little more, however you can avoid cross collaterisation and still use the equity from existing property relatively easily. You just need to release equity from your existing properties through top-ups or redraws, then take that cash as the deposit for your new property loan with a different lender. The bright side of all of that: any extra cost should be tax deductible on investment properties (for now) and in any event. it buys you a bit of insurance by protecting individual assets in your portfolio from changes in the other.