- Many investors are falling prey to the standard practice of cross-collateralisation
- This is when banks take security over existing properties to borrow funds for another
- Collect as many single titles, and standalone mortgages as possible
It seems that a lot of investors are climbing on board the investment trail and mortgaging whatever equity they have in their home to ensure their start in the exciting opportunities of property investment.
To that end, many investors are unwittingly falling prey to the standard bank’s practice of cross-collateralization.
What does entail? Cross-collateralisation simply means that if you own one property and are borrowing to purchase another that the bank will take security over both properties.
Now, in some cases, this is unavoidable – such as if you are borrowing towards the maximum limit – but in the majority of instances, the banks are taking far too much security.
If you understand the banks will lend up to 80% for residential investment, then in a majority of cases the banks don’t need this extra security.
However, failure to request non-cross collateral of your property will result in the bank’s authorities automatically taking more security than they need.
Say your current home is worth $500,000 and current home mortgage is $200,000
This means you can borrow up to another $200,000 without additional security i.e you can borrow a further 80% on your home (or $400,000 in total) and proceed to purchase your investment property as a free and unencumbered title.
This title is held by you and at any time in the future, you can borrow against this property to purchase another.
As indicated in this example, unless you direct the banks otherwise, they will automatically take security over your new purchase as well as your home – the banks will always take as much security as possible to naturally cover their position.
What this effectively does is tie you to one bank and as you begin to purchase more investment properties, you have created a web of cross-collateralisation over your whole portfolio.
This will restrain your ability to deal out in the open marketplace at various times and to take advantage of other banks or institution offers and loans in the coming year.
Cross-collateralisation ties you to one bank and the more involved you become the more costly it will become to unravel the web of cross collateralisation when you sell or refinance.
Where possible, have every loan stand by itself with as little relief to other securities as possible.
It’s as simple as playing Monopoly on a real-life scale.
Collect as many single titles, and standalone mortgages as possible and continue your path to wealth creation.