The Pros and Cons of Cross Collateralisation

An investor who wishes to purchase a new investment property with an investment loan may be required to participate in cross collateralisation. Cross collateralisation is when the lender requires the borrower to use more than just the property being purchased to secure the loan. There are both benefits and deterrents to cross collateralisation.

Pros

• Convenient if the investor will not purchase further investment properties.
• Lenders may provide interest rate discounts for cross collateralization.
• Less loan accounts with less fees to pay.

Cons

• As a lien holder, the lender has the authority to prevent sale of one of the properties or require conditions to the sale.
• Inability to finance another investment property because of perceived serviceability.
• Some lenders may ask for more security than is necessary for 100 percent financing.
• If an investor wants to increase one of the loans on a cross collateralised account, valuation costs can be burdensome because multiple properties will need to have a valuation.
• The lender may prey on the borrower’s unwillingness to refinance in the future because of the costs involved, so the interest rate offered may not be the best on the market.

There are pros and cons to any financial transaction, but wise investors always look at both sides. Cross collateralisation can be a useful tool for a savvy investor.