Cross Securing – Avoid Like The Plague!

Firstly what is cross securing? This is the act of using a collective ‘pool’ of equity spread across 2 or more properties to secure mortgages. There is no clear and defined line of which mortgage is secured by which property, and is a very lazy way of loan structuring, mostly banks are the main offenders and some less experienced (or lazy) brokers. The dangers of this are:

1. Any decline in value of any of the cross secured properties WILL bring down the overall available equity in your portfolio, and even worse negate any growth had by your stronger property
2. If you decide to sell a property to claim the profit, the bank will have to value ALL the properties in the mix to make sure that there is sufficient equity left over after your sold property is taken out of the equation, and if you find a drop in value, guess what? You will have to cough up some sale proceeds to keep the bank happy, to pay down the loan enough to match the new reduced value.

Headache? You bet. On the flipside, let’s say you have 3 properties, 1 home and 2 investments. All 3 are separate either with the same bank or different banks, either way is fine as long as they aren’t touching! Your home drops in value in a declining market yet your investments start climbing (they are in a different state) and you now have access to ALL the equity growth across both properties in full. Let’s say your investments decline and your home shoots forward (and it happens, that’s just property cycles for you!). Is this the end of the world? Nope. Just means you can leverage more on your home again to invest and be secure in the knowledge that your declining properties will pick up again in the next cycle. Read more about this HERE.

Time to sell investment property number 2 to claim the profit and reduce your own mortgage? No hassles. No other property is involved in this transaction, the bank is only concerned about this property as it is the only security securing the loan to be cleared.

Many of my clients come to me with full cross securitisation. First step before anything happens is to get rid of the risk associated with this and set each property up as standalone. Then we can proceed.

If you think your loans are cross secured, odds are you were the victim of a lazy or uneducated bank manager or broker, and need to get in touch ASAP to have this checked and repaired.