Cross-collateralisation, also called cross-securitisation, is when a lender uses more than one property as security for one or more loans. Investors sometimes use this structure to access equity in an existing property when buying another.
The properties become linked in the lender’s security arrangements. Selling, refinancing or changing a loan may then require the lender to review the other properties. Before agreeing to the structure, ask for a security schedule showing which properties secure each loan.
What is Cross-Collaterisation?
Cross-collateralisation is when two or more properties secure a loan, or when properties secure multiple loans. For example, a lender could take mortgages over your home and an investment property to secure your investment borrowing. The number of loan accounts does not tell you whether the securities are separate. Check the loan and mortgage documents.
A separate equity-release loan secured against your home, alongside a purchase loan secured against the new property, is another way to structure a purchase. Ask the lender or broker to show how each option links the properties and loans.
How do I qualify?
Lenders assess the full application and apply their own credit and security policies. They generally consider your income, expenses, existing debts, available equity, property values and the type and ownership of each property. Equity alone does not ensure approval. You still need to meet the lender’s serviceability and credit criteria, and the lender must accept the proposed properties as security.
Which Lenders Allow Cross-Collateralisation?
Lender policies differ. Check that the lender accepts the property types, ownership arrangements and total lending exposure in your proposed structure. Confirm the current requirements before committing to a purchase or refinance.
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The main potential benefit is using equity in an existing property as part of the security for new borrowing, without selling that property. The value of this structure depends on the lender’s terms and how much flexibility you need later.
Using Equity in an Existing Property
With lender approval, equity in an existing property forms part of the security for new borrowing. This is one way to fund a deposit or purchase costs. It does not remove serviceability checks, and a separate equity-release loan is another structure to compare.
Keeping Loans with One Lender
Some borrowers prefer to manage lending across several properties through one lender. The loans still have their own rates, repayment terms and features. Keeping the lending with one institution also concentrates your portfolio with that lender.
Cross-Collateralisation Does Not Guarantee a Lower Interest Rate
The loan’s interest rate depends on the lender, loan purpose, product and your circumstances. Securing investment borrowing against your home does not change the purpose of the loan or guarantee owner-occupied pricing. Compare the rates, fees and repayment terms for linked and separate structures.
Cross-Collateralisation and Tax Deductions
p>Cross-collateralisation does not itself create a tax deduction. The Australian Taxation Office looks at how borrowed money is used, not which property secures the loan. If a loan funds both private and investment purposes, the interest may need to be apportioned. Keep clear records of each borrowing and check the tax treatment with a registered tax agent.
What Are the Drawbacks?
Linking properties means a decision about one property can affect the lender’s assessment of the others. This can limit your options when property values change, or when you want to sell or refinance.
A Market Downturn Can Reduce Available Equity
A lower valuation reduces the equity available for release and increases the loan-to-value ratio, assuming the debt stays the same. A rise in another property’s value does not guarantee the lender will approve a release or new borrowing. The lender assesses the full security position.
Selling One Property Requires the Lender to Release Its Security
Before settlement, the lender must discharge or formally release its mortgage over the property being sold. If that property secures other loans, the lender reviews the remaining debt and security before approving the release. Ask for the payout figure and release conditions well before settlement. The sale price alone does not tell you how much of the proceeds you will keep.
Refinancing Can Involve Multiple Valuations
The lender decides which properties need valuation as part of a refinance or security-release assessment. Valuations add time and may involve fees. A lower valuation changes the assessed equity and loan-to-value ratio.
Switching to a New Lender Requires a Fresh Assessment
A new lender assesses your current finances, properties and loan structure under its own criteria. If you want to move only one loan, the existing lender must agree to release any security attached to it. Check for discharge, valuation and application fees, fixed-rate break costs and any lender’s mortgage insurance before comparing refinance options. ASIC’s Moneysmart guidance also recommends weighing switching costs against the savings and checking the new loan term.
Repayment Options Depend on the Lender and Product
Cross-collateralisation does not determine whether a loan has principal-and-interest or interest-only repayments. Confirm the repayment type, loan term and any change in repayments when an interest-only period ends.
Is Cross-Collateralisation Right For You?
Cross-collateralisation is worth comparing when you want to use equity in an existing property and accept that the lender’s release conditions apply across linked securities. Separate securities usually provide more independent options for selling or refinancing each property, subject to lender approval and normal lending criteria.
Before choosing a structure, ask:
- Which property secures each loan?
- What fees, valuations and payout conditions apply?
- What must happen before the lender releases one property?
- How will you keep investment and private borrowings clear for tax records?
- How do the interest rates and repayments compare with separate securities?
- How would the structure work if you plan to sell your home and move into an investment property?
Speak With Home Loan Experts
If you are reviewing an existing structure or planning another investment purchase, speak with a mortgage broker about the security schedule, available equity and release conditions. Call 1300 889 743 or complete the online enquiry form. This article provides general information, not personal financial or tax advice. Confirm current lending terms with the lender and tax treatment with a registered tax agent.