Cross collateralisation – what is it and why is it bad?
Damian Collins
Chairman of Westbridge Funds Management, MD at Momentum Wealth, Former President REIWA
Cross collateralisation is one of the most common mistakes made by property investors. But what is it and why should it be avoided?
Cross collateralisation is when an investor uses more than one property as security for a loan.
For example, let’s say Jane Doe wants to purchase a $400,000 investment property.
Jane currently has:
- A house worth $600,000
- $200,000 remaining on her mortgage with Lender A
- No deposit or cash
Given the amount of equity in Jane’s house, she can approach her lender (Lender A) and secure the entire $400,000 needed to buy an investment property.
Following the transaction and acquisition, Jane will have $1 million worth of property and $600,000 worth of debt.
What’s more, with an 80% loan-to-value ratio, Jane will also have at least another $200,000 of equity in her properties.
If Jane wants to utilise this equity to purchase another investment property, she can approach Lender A for another loan. However, depending on her circumstances and the lender’s policies at the time, they may reject another loan application from her.
No big deal, right? Jane can always approach another lender?
Actually, it’s not that simple.