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  • Writer's pictureColin Green

What Is A Cross Collateral Loan?

Updated: Dec 4, 2023

A cross-collateral loan, also known as a cross-collateralized loan, is a type of loan arrangement that involves using multiple assets or properties from an initial loan as collateral to secure a second loan. In a traditional loan, a single asset (such as a house or a car) is used as collateral for the loan. However, in a cross-collateral loan, more than one asset is pledged as collateral. This means that if the borrower defaults on the loan, the lender has the right to seize any of the assets that were used as collateral to recover the outstanding debt.


mortgage loan agreement as part of a cross collateral loan

How Does Cross Collateralization Work?


While it can be applied in a variety of financing situations, cross collateralization is actually quite common in real estate. These are a couple of the more common scenarios that it is used:

  • When two or more properties are involved in securing a loan

  • When the equity from an owner occupied property is used to buy a second (or third) investment property.

Generally when your Loan to Value Ratio (LVR) goes below 80% most lenders will allow you to access your equity (the difference between the home’s current market value and the remaining mortgage payments). This can be used to purchase a new property instead of having to save up a deposit.


So when you hear the term ‘second mortgage’ this is actually a form of cross collateralization. In this scenario the homeowner is borrowing against their home equity to fund other projects. The reverse of this situation can also be implemented: when two or more properties are used as collateral for one loan.


Advantages of Cross-Collateralized Loans


Among the potential advantages of a cross collateral loan are:


1. Higher Loan Amounts

Cross-collateral loans can enable borrowers to secure higher loan amounts than they might with a single collateral, as the combined value of multiple assets can support a larger loan.


2. Potentially Lower Interest Rates

Lenders might be more willing to offer competitive interest rates on cross-collateralized loans since the risk is spread across multiple assets, potentially reducing their overall exposure.


3. Borrow Associated Property Costs

If the combined value of multiple assets can support the higher loan amount, you may be able to include property costs such as stamp duty, legal fees & lender set-up costs within your loan, reducing your cash contribution to the purchase.


4. Potential Tax Benefits

You may be able to claim tax deductions on your investment properties. If you’re using equity to purchase an investment property at 100% of the value, you can potentially claim a 100% tax deduction.


Disadvantages of Cross-Collateralized Loans:


The drawbacks of a cross collateral loan are more numerous and include:


1. Higher Risk for Borrowers

If the borrower defaults on the loan, they stand to lose multiple assets instead of just one. This can lead to a more severe financial consequence.


2. Complex Process

Cross-collateral loans can be more complicated to set up than traditional loans, involving assessments of multiple assets and their values.


3. Less Flexibility

Once assets are tied to a cross-collateral loan, it can limit the borrower's ability to sell or otherwise leverage those assets until the loan is paid off.


4. Limited Lender Options

Not all lenders offer cross-collateralized loans, so borrowers might have fewer options to choose from.


5. Difficulty in Refinancing

If a borrower wants to refinance the loan or remove one of the assets from the collateral list, it can be a complex process and might require renegotiation with the lender.


6. Unintended Consequences

If the value of one of the collateralized assets declines significantly, it can affect the overall security of the loan and might require the borrower to provide additional collateral or pay down the loan.


Other Considerations When Deciding On Cross Collateralization


As we highlighted in a previous blog, LMI (Lenders Mortgage Insurance) is a type of insurance that protects the lender (not the borrower) in the event that you default on your mortgage payments. It is usually triggered when the loan required is considered a higher risk by the lender and more specifically when the loan you apply for is for more than 80% of the property’s value.


When you have a cross collateral loan the LMI is calculated on the total lending amount and so the insurance premium could potentially be very expensive.


So Is A Cross Collateral Loan Right For Me?


Before entering into a cross-collateral loan agreement, borrowers should carefully consider both the advantages and disadvantages. It's important to assess your financial situation, risk tolerance, and the potential impact on their overall financial well-being. Getting advice from an expert finance broker is highly advisable. Every situation is different and a home loan expert would be able to help you determine whether this type of arrangement would work for you.


The information in this article is general in nature and doesn’t take into account your personal circumstances or financial situation. If you are looking for a home loan home, the experienced home loan experts from CJG Finance can help you navigate the process.

To find out more, contact us or call Colin at CJG Finance on: 0402 413 917 or email him: cgreen@cjgfinance.com.au

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