Property investment loans
Australians are big fans of investing in residential property. Generations have built their wealth on bricks and mortar, secure in the knowledge that residential real estate can deliver regular, tax-friendly rent returns and long term growth in value.
When it comes to real estate investment, you can’t play the game unless you can come up with the money to fund your investments. The type of loan that you decide upon will depend on your financial situation, time of life, the real estate investment options you are pursuing and your investment strategy. At Real Estate Investment Finance our finance brokers are investment loan finance specialists and we specialise in structuring your lending correctly to assist you in building a property investment portfolio.
Investment loan structuring
A lender would always be concerned about their ability to recover the loan funds before approving a finance application for further processing. The solution to this issue would be the idea of cross-collateralising the family home with the investment property. In other words, the family home would be utilized as a security in case of default. People do not wish to lose their family home, so having it as a form of equity to support the total amount of borrowings would satisfy the lender.
Cross-securitisation / Cross collateralisation can be defined as the process where a loan is reliant upon more than one property as security. You can have multiple loans secured by one property, but not multiple properties securing more than one loan.
Cross collateralisation is often perceived as a means of unlocking untapped wealth hence many investors view it as the solution to all their financial problems. This could not be any further from the truth in reality.
In most cases cross collateralisation is unnecessary, even dangerous for the property investor.
Home loan brokers and lenders tend to cross collateralise properties because it saves them valuable time and paperwork but most don’t realize the risks involved in pursuing with such a strategy. Also, many brokers simply don’t have the resources, expertise and the time to design a tailor made safe, effective strategy.
Reason for avoiding cross-securitisation is to maintain your flexibility and keep your banking transactions as simple as possible. There are a plethora of examples about how cross-securing loans can have negative consequences and we see it often on a daily basis. Some examples include:
If you want to borrow more than 80% of one investment property and loans are cross-securitised, the mortgage insurer will charge its mortgage insurance premium (LMI) on all your lending, not just the new loan. The additional mortgage insurance cost could be worth thousands of dollars.
If your loans are cross-securitised and you sell a property, the bank has the authority to control your sale funds and demand that you use all the funds to repay debt. Perhaps you only intended to repay the debt associated with the property you sold and keep the residual cash, however, the leverage in reality favours the banks and they would utilize this position of power for their personal gain.
If your loans are cross-securitised, the bank will revalue all properties simultaneously and the risk is that lower valuations could offset higher ones thereby reducing your “available” equity. Instead, having loans individually secured allows you to “cherrypick” which properties to revalue. If all your loans are cross-securitised and your lender either declines to advance further borrowings or hikes up interest rates and fees, it might be very costly to move some or all lending elements to another lender, particularly if some of your loans are fixed. However in simple terms, it is advisable to avoid cross-securitisation wherever practical.
If your lending is currently cross collateralised then get in contact with us today for assistance in restructuring your lending and untangling your portfolio.
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