Investors: Don't Let This Strategy Jeopardise Your Long Term Goals
Updated: Aug 9, 2022
Real estate investors often make the mistake of utilising more than one asset to secure a loan or several loans. This strategy is called cross-collateralisation. It's messy and can potentially negatively impact your financial goals. Here at REIF, our finance specialists don't encourage clients to utilise this strategy when they're buying an investment property.
In this blog we'll unravel the complications that cross-collateralisation could cause to your finance structure and livelihood as a passive income earner. We will also share how our finance specialists are avoiding this strategy for investors, especially those with a diverse property portfolio.
The Complications Cross-Collateralisation Can Create For Real Estate Investors
Real estate investment is in doubt a long term game. Therefore, if you are utilising several properties to fund the cost of another investment property, you could be putting yourself at risk of several complications.
The first issue that cross-collateralisation strategy can create for those buying an investment property is limited flexibility. If an investor chooses to utilise the security from more than one existing property, the lending all needs to be through the one lender. Propertyology states that if a property were to sell, "the bank might require that the sale proceeds are used to reduce other loans in that portfolio, to keep the Loan to Valuation Ratio (LVR) within a certain level..."
Massive Break Costs
Those who decide to leave a lender prior to their agreed contract date can expect break costs. Break costs can be significantly higher if you utilise the cross-collateralisation structure.
Generally, establishment fees are higher for mortgage loans that have been secured by two or more other assets. This is because you can't just move one or two assets to a new lender. You need to move everything over, or nothing at all.
General Exposure To Risk
Putting all your eggs in one basket as an investor is basically an open invitation for risk. Investors that cross-collateralise their properties may be required by the lender to sell all of their assets, even if they are just wanting to sell one. This is because the loan is considered as one and exists under the one 'umbrella.'
Additionally, another risk that you could expect to incur in this situation is that your lender may decide to control which product is used and they could limit the number of interest-only loans allowed. Using this method can also increase your risk for lenders possessing your combined assets.
How To Avoid Cross-Collateralisation
Our finance specialists at REIF are working with clients to establish structures that are beneficial for them. We are working with clients who have previously been mislead to utilise the cross collateralisation structure when building their portfolio. Our finance specialists are restructuring client home loans to put them in a more suitable position.
Avoid putting all of your eggs in the one basket. Reach out to our team of property and finance specialists. Combined, our specialists have decades worth of experience to ensure your investment property can work for you, financially.
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