The biggest property investing “no no” seen by mortgage broker What If We Finance is the cross collateratisation of securities by the banks. Simply put if you own two or more properties the bank may group the properties as security against one loan. Banks tend like these arrangements because the get more security than they need and often argue it is easier to approve a loan with such an arrangement. Simply put that is not true!
While cross collateralisation may sound appealing because you one have one loan and one fee in the long run this type of arrangement could be limiting. When you decide to sell a property or refinance the bank needs to agree to the release the security. The bank can ask for the full amount of the loan to release the security and you are really have no choice but to pay what they ask. Consider the following example:
a. you have a loan secured by property 1 worth $820,000 and property 2 worth $300,000 so the total security value is $1,320,000
b. the loan balance is $600,000
c. you sell property 2 for $300,000
In such a scenario the bank still has adequate security cover and one would expect the bank to release property 2 and not ask for a balance reduction.BUT depending on the banks credit policy and their assessment of you financial situation they may take all or part of the proceeds of the sale and reduce the loan. While that in itself is not a bad thing if it aligns to your financial objectives as a property investor you want to have control. You do not want to be put in a position where the bank dictates terms.
If you did not cross collateralise your securities and had as an example the following scenario
a. property 1 secured a separate loan facility for say $480,000
b. property 2 secured a loan facility for say $120,000
In that scenario you would only have to pay $180,000 and are free to use the balance of funds as you wish.
Investors often argue why should I pay 2 fees for the facility but as an investor you want flexibility and the choice to make decisions consistent with your objectives and not be limited by bank policy. In addition there is no reason for banks to force you to cross collateralise and as a rule you should not pool your securities together especially if you plan to grow your portfolio.
Speak to your mortgage broker What If We Finance for more information or if you have any questions.