What is Cross-Securitisation in Home Loans? A Guide to Cross-Securing Properties
When it comes to property investing or taking out multiple home loans, the concept of cross-securitisation (also known as cross-collateralisation) may come up. Cross-securitisation allows borrowers to use more than one property as security for a single or multiple loans. While it may seem like an efficient way to borrow more and simplify the loan process, it comes with potential risks that property owners should be aware of.
In this article, we'll explain what cross-securitisation is, how it works, its advantages and disadvantages, and whether it’s the right strategy for you.
What is Cross-Securitisation?
Cross-securitisation is when a lender uses multiple properties as collateral to secure one or more loans. Instead of having one loan secured by a single property, two or more properties are linked as security across the entire portfolio of loans.
For example, if you own a home and want to purchase an investment property, you can choose to cross-securitise both properties. This means the lender can use the equity from both properties to secure the loan for the new property.
How Does Cross-Securitisation Work?
Let’s consider a common scenario:
You own your current home with a mortgage of $300,000. The property is worth $700,000, giving you $400,000 in equity.
You want to buy an investment property worth $500,000 but only have $100,000 in cash for a deposit.
Instead of needing a large deposit or additional savings, the lender can use the equity in your existing property (your home) to cover the shortfall. This way, both your home and the investment property are cross-securitised to support the new loan.
Pros of Cross-Securitisation
Access to Equity: One of the main reasons borrowers opt for cross-securitisation is the ability to access equity in an existing property without selling it. This equity can be used to purchase additional properties, reducing the need for large deposits or savings.
Potentially Higher Borrowing Capacity: By using multiple properties as security, the lender may be more willing to approve a larger loan amount since they have more assets to back it up.
Streamlined Loan Management: Cross-securitisation can simplify the loan process by consolidating multiple properties under one lender and potentially one loan agreement. This can make it easier to manage repayments and communication with the bank.
No Need for Multiple Loans: In some cases, borrowers may not need to take out separate loans for each property, which can reduce the administrative work and fees involved in managing multiple mortgages.
Cons of Cross-Securitisation
While cross-securitisation offers some clear advantages, it also comes with significant risks and downsides:
Loss of Flexibility: One of the biggest disadvantages of cross-securitisation is the loss of financial flexibility. If you want to sell one of your properties, you can’t simply discharge that loan without the lender reassessing the security and potentially requiring you to pay down part of your other loans. This can make it more complicated to sell a property or restructure your loans.
Increased Risk: With cross-securitisation, your properties are linked, so if something goes wrong with one property (for example, a downturn in property value), the lender has a claim on both properties. This means you could lose more than just one property in a worst-case scenario, as both properties are tied to the loan.
Valuation Risk: If the property market declines, the lender may reassess the value of all properties used as security. If the combined value of the properties falls below the total loan amount, the lender may require you to pay down some of the debt to reduce their risk exposure.
Difficult to Refinance or Switch Lenders: Cross-securitisation makes it more difficult to refinance with a different lender. If you want to switch lenders for one property, you may need to refinance all of the loans, which can involve significant fees and complexity. Additionally, lenders may be less willing to take on a cross-securitised portfolio, limiting your ability to shop around for better rates.
Longer Approval Process: Since the lender is assessing multiple properties for security, the approval process can take longer and require more documentation, such as valuations for each property involved.
Alternative to Cross-Securitisation: Standalone Loans
One way to avoid the risks associated with cross-securitisation is to opt for standalone loans. With standalone loans, each property has its own individual loan secured by that specific property alone.
Here’s how it works:
Your home loan is secured by your home, and your investment property loan is secured by the investment property.
If you want to sell one property, you can do so without affecting the loan on the other property.
Each loan is treated independently, giving you more flexibility and control over your financial decisions.
While you might need to pay for two separate valuations or manage more than one loan, the flexibility and reduced risk of standalone loans can make them a better option for many borrowers.
Who Should Consider Cross-Securitisation?
Cross-securitisation might be suitable for borrowers who:
Have a clear long-term investment strategy: If you have a well-defined property investment plan and are comfortable keeping both properties for the long term, cross-securitisation may be a useful way to leverage equity.
Want to grow their property portfolio quickly: Cross-securitising can make it easier to purchase additional properties sooner, as it allows you to tap into your existing equity without needing large cash deposits.
Don’t plan to sell properties in the near future: If you’re not planning to sell any of your properties or refinance, the restrictions of cross-securitisation may not be an issue.
When Should You Avoid Cross-Securitisation?
Cross-securitisation may not be the best option for borrowers who:
Value financial flexibility: If you want the freedom to sell individual properties, refinance, or switch lenders without complications, standalone loans are likely the better choice.
Are concerned about market fluctuations: In uncertain market conditions, cross-securitisation increases your exposure to valuation changes. If property prices fall, you could find yourself facing higher repayments or forced to pay down debt.
Want competitive loan terms: Cross-securitisation can make it harder to negotiate with lenders or shop around for better interest rates and terms in the future.
Conclusion: Is Cross-Securitisation Right for You?
Cross-securitisation can be a powerful tool for property investors looking to leverage their equity and expand their portfolio quickly. However, it comes with added risks and less flexibility, which can make it harder to manage your portfolio or sell properties in the future.
Before deciding whether to cross-securitise, it’s important to understand your long-term financial goals, the potential risks involved, and the impact on your financial flexibility. In many cases, opting for standalone loans can provide a safer and more flexible approach to managing your home loans.
At Rosh Partners, we specialize in helping homeowners and property investors navigate the complexities of mortgage structures, including cross-securitisation. Our experienced brokers can guide you through the process and help you find the best loan strategy for your unique situation.
