Cross Securitisation is sometimes known as cross collalatorisation. It refers to when you pool multiple properties together and the bank treats this as a single security. For instance you have 2 properties worth $900k and $600k respectively ($1.5mn in total) and only $400k in debt… your debt is secured by both properties. Most people would be better off removing one property from the mix. Imagine betting at the casino and putting all your chips on the table for small bets when you don’t need to.
For some borrowers this cross-security can be a good thing, but for many people over the long term it is something you’ll want to consider avoiding. Keeping all your eggs in one basket when investing in property is a dangerous game. If you’re building up a property portfolio it’s often best to keep your lending options open and not use the same bank for all of your mortgages.
Once you hit a specific threshold of lending a bank will change your risk profile and might start calling in your debts before you’re ready to pay. The reasons to use cross-security are simple:
- It is the only way to get finance approved for new lending and new purchases
- It provides you with lower rates or more cashback (or a combination)
Now if you have enough equity, the reasons to avoid cross security are worth researching.
- If there is a chance you may default on one of your mortgages in the future because of ill-health, lost income, bad tenants, insurance problems, etc then the bank might decide to foreclose against all of your cross-secured properties at the same time. Against your wishes the bank may decide to sell properties you are not ready to sell.
- If you make frequent changes to your loan limits or properties then the bank may require valuations on all the properties it is using as security. This is expensive and time consuming and risky in markets where valuations fluctuate significantly.
- If you are using maximum leverage then you need to be careful not to get caught out when 1-2 properties fall in value 10% and the bank says they’re going to make you sell more than one property.
- If you ever want to sell one of your properties, you need to know what cash you keep after the sale, because in many cases the bank may recall more than you expect and you can end up selling a cash producing asset to pay of debt and get cash in the bank and not end up being allowed to keep the cash!
A local couple, with 4 rental properties, in their early 60s thinking about retirement:
Julie and her husband have almost had enough of work, some of their friends passed away or become ill recently, and they are beginning to think it’s time to enjoy life. They are asset rich with 5 properties, but cash poor, and were thinking about selling one of their rentals to reduce their $1.5mn of debt and give them some cash in the bank. What they did not realise is that if they sold one of their houses, the bank would probably want all of the cash and they’d simply be selling a cash producing asset for no actual cash gain. So Brandon at iRefi.co.nz helped them remove one of their properties as security and freehold it. Now when they do decide to sell the property, the cash from the sale will stay in their bank account. Julie and her husband got the peace of mind working with an expert and talked about different scenarios for the future. Now they can slow down how much they work at their own pace.
When does it make sense to change banks?
To conservative investors, cross collaratisation is not bad… but you are making a house of cards and need to know the consequences if you’re dealt a bad hand. Property investors who are focused more on cash and cash flow and less on buying should reassess if they have enough equity to freehold or separate properties so they can sell them whenever they like without major consequences or unexpected frustrations.
A lot of clients have come to iRefi.co.nz to get advice on separating their portfolio and pre-paring for future cash injections from sales over their retirement years. When you have the equity, it makes sense to split bank's if you still have high debt levels, but you must do this before you stop earning an income. Banks love PAYE and business income on top of rental income. For some reason the scale down rental income (in some cases) quite a bit and this makes it hard to switch banking setup for some properties if you’re not drawing income from different sources.
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