Cross-collateralisation is the process of utilising more than one property as security for a mortgage rather than the traditional one property for one mortgage.
To put it simply, you as an investor may be looking to purchase another property without using any of your savings, rather tapping into your property equity. The bank or lender can then use both properties as collateral for a new home loan.
Given the growth of the Australian property market in recent times, taking advantage of an increase in home equity may be appealing to investors through cross-collaterisation, yet its important to weigh up a number of factors before signing another home loan contract.
As an example let’s say your home is worth $800,000 and you’ve paid off your mortgage, hence you have $800,000 in equity. You decide you want to buy a $400,000 investment property but you don’t have the cash for a 20% deposit. So you go to a lender and ask to use your home as the security for a $400,00 loan to buy the $400,000 investment property. If approved, this means that this one loan is secured by two properties worth a combined $1.2 million, putting the lender in a very safe position with a loan-to-value ratio (LVR) of 33.33%.
It’s common for property investors to diversify their portfolio with home loans across multiple lenders given using one bank or lender can potentially place all the power solely in their hands. A way around this is to take out separate loans for each new property with the deposit and costs coming from an established line of credit or offset account.
Cross-collateralisation may be a good option to score a better owner-occupied rate and avoid having to dip into your own savings to buy an investment property. That being said, it’s important to carefully weigh up the pros and cons as to what is best for your current financial position and to consider seeking financial advice to help determine the loan structure that suits your circumstances.
Looking to seize the day and grow your property portfolio? Be sure to check out our range of investor home loans to help your broaden your property horizons.
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