expert-q-a

Investors ask: Cross-collateralisation

By Peter Boehm

I’m looking to buy my first two properties this year. I’ve been warned about cross-collateralisation. What is the problem with doing this?

Cross-collateralisation is where a lender uses several properties as security for a loan or loans.

Before agreeing to a cross-collateralisation, it's worth considering the pros and cons.

Pros
* You are more likely to get your loan approved because your lender has increased security
* You may be able to avoid lender's mortgage insurance (LMI) if the combined security brings the overall loan-to-value ratio under 80 per cent
* You may save time and money by dealing with one lender
* It removes the hassle of having to apply to a number of lenders, and may save you having to pay multiple loan fees

Cons
* You may miss out on better loan deals available elsewhere
* If you want to sell a property because it is not performing or you need the cash, your lender may insist on revaluing the remaining properties to ensure the overall security is adequate, costing you time and money. Plus, the lender may insist all the proceeds go to reducing your debt
* If something goes really wrong, you could lose the lot, including your home, if it's been used as security
* Being locked in to a single lender could be problematic if the relationship sours

Peter Boehm, columnist, Yahoo!7 Finance

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