Cross-Collateralisation and Investment Loans Explained

Cross-collateralisation links your properties together under one lender, and that link is worth understanding before you sign.

For a Bundoora homeowner thinking about buying an investment property, the structure of your loans can matter as much as the price you pay. This article explains what the arrangement involves, where it can limit you, and how to ask for a structure that keeps your options open.

What Is Cross-Collateralisation?

Cross-collateralisation is when a lender holds more than one property as security for your borrowing, so the properties back the loans together rather than separately. Typically this happens when you use the equity in your home as part of the security for a new investment purchase.

In a stand-alone structure, each loan is secured by one property only. In a cross-collateralised structure, the lender can look to every property in the pool if something goes wrong. That ties your assets together.

Where several loans are secured over the same property, APRA's prudential standard adds those loan amounts together when measuring the loan to value ratio (LVR). How a lender measures LVR across multiple securities is set by its own credit policy, and this varies between lenders.

What Are the Risks of Cross-Collateralised Investment Loans?

The main risk is lost flexibility. When properties are pooled, selling or refinancing one of them usually needs the lender's agreement, and the lender may reassess the remaining security before it releases anything.

There are a few practical consequences to weigh up:

• If you sell one property, the lender may require some of the proceeds to be paid against the pooled debt, and may want a fresh look at the remaining property.
• If one property falls in value, the combined LVR rises across the whole pool, which can affect the lender's view of all your loans.
• Moving one loan to another lender can be difficult, because the loans are tied together. This may make a refinance more involved.

The arrangement may suit some borrowers who plan to hold everything long term with one lender. Using equity still increases your total debt, and if that takes total borrowing above 80 per cent LVR, lenders mortgage insurance (LMI) may be needed. Whether it suits you depends on your goals, and that is worth discussing before you commit.

How Much Can You Borrow Against Your Home Equity?

How much you can borrow depends on your lender's LVR policy, the value of your security and your ability to service the debt. Lending above 80 per cent LVR generally needs LMI, which is a cost to you, and approval from both the lender and the insurer.

APRA requires authorised deposit-taking institutions (ADIs) to assess new borrowers at a rate at least 3.0 percentage points above the loan rate. Non-bank lenders are not bound by this requirement. For rental income, APRA's guidance (APG 223) expects ADIs to apply a haircut of at least 20 per cent to expected rent for non-occupancy. Individual lenders may apply a larger haircut or place less weight on rental appraisals. So a property's rent will not cover as much of a new loan on paper as you might expect. A borrowing capacity check before you start looking tells you where you stand.

Cross-Collateralisation Example: A Bundoora Home and a Unit

Consider a Bundoora homeowner with a sizeable amount of equity in their home who wants to buy an investment unit. The lender offers to take both the home and the new unit as security for one combined loan. That avoids a cash deposit, but it pools the two properties together.

The broker suggests a different structure. The investment purchase is secured by the new unit alone. A separate loan, secured by the home, is drawn for the deposit and costs. For illustration, take a $100,000 deposit loan at 6.75% p.a. on an interest-only basis. Interest is approximately $6,750 a year, or about $562.50 a month. This is an illustrative rate only, and your actual rate depends on your lender and circumstances.

The outcome is that the two loans sit separately. Years later, if the owner sells the unit, the sale may be simpler because the unit secures only its own loan. The lender can still require the proceeds to be applied to the debt, and the deposit loan against the home remains. The trade-off is that the deposit loan is extra debt, interest-only repayments do not reduce the balance, and the lender will still test the new debt against the borrower's income. The interest on the deposit loan may be deductible because the funds were used to buy a rental property, but that depends on how the money was used. Speak with your accountant about your own situation.

Why Loan Structure Matters in Bundoora

Yields are only one part of the picture because they do not account for loan costs or vacancy.

A unit and a house usually carry different risks, such as body corporate fees on units and a different mix of tenants. Keeping each property's loan separate lets you decide later which asset to keep, sell or refinance.

If your equity sits in your home, our page on refinancing to release equity covers how that equity can be accessed. Our investment loans page outlines the lenders and structures we can compare for you, and we can discuss them in the context of your wider property portfolio plans.

Questions to Ask Before You Agree to Cross-Collateralised Security

Ask your broker whether each loan can be secured separately, and what it would cost you to do so. Also ask what happens to the remaining security if you sell one property, and whether you could refinance one loan without moving the others.

If you already hold cross-collateralised loans, a loan health check can show whether the structure still suits you. Lender policy varies, so ask whether separate securities are available. Our Bundoora team at Mortgage Broker in Bundoora VIC can walk you through the options.

Call one of our team or book an appointment at a time that works for you, and we will map out a loan structure that protects your flexibility as your portfolio grows.

Frequently Asked Questions