Cross-collateralization (also referred to as Cross Securitization) means a loan which relies on more than one property for security – that is, there are two or more properties which are the security for one loan.
It is important to consider the structure of your investment loan security as it is best to avoid cross-collateralization as much as possible.
The hypothesis may be that is that if the bank is feeling safer, there must be some benefit for the borrower?
You won’t get a higher LVR! You don’t get better rates! The serviceability, or how much you can afford to borrow, is still the same, whether you Cross-Collateralize, or not.
Cross-collateralization ties you to one bank and the more involved you become the more costly it will become to unravel the web of cross-collateralization when you sell or refinance.
Major Banks, lenders, finance brokers and originators have all promoted ‘cross-collateralizing loans’, whereby the lender uses all properties mortgaged with it, as security for your outstanding loans. They also attempt to refinance all your existing loans with the one lender.
There are a number of reasons for doing this – and none are for the benefit of the client.
The reasons lenders do this, in our view are: