Cross-collateralization 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...
This can occur when someone uses their current home as the collateral for the new property they’re purchasing. In this case the loan will be secured by both properties.
Lenders may suggest this as a solution; however it’s fraught with problems...
The primary danger is that it limits your choices. You won’t be able to choose the best deal in the market if your loans are cross-collateralized. This is an attempt by the Bank to control all your assets in the way that they want it to. It is important to put in place ‘Firewalls’ between your properties in case something happens to you in terms of cash flow.
If you are structured properly, in such an event you will be able to choose which property should be sold or repossessed first… leave the choice to the Bank and 90% of the time your home will go first as it is the one you are concentrating on paying off, the one with the most equity and the easiest one to sell.
Not only are ‘Firewalls’ between your properties are crucial to your safety but if they are structured properly they can contain ‘Buffers’ which make it nearly impossible to get that much in trouble that a repossession is on the cards… If you take control back from the Bank, you should be ‘safe as houses’.
Every situation is different however to avoid cross collateralization the following simple rules should help… try to:
• Obtain a different loan for every property
• Obtain the different loans from different banks unless the bank you are using uses a ‘trustee company’ as the mortgage holder. Examples of trustee companies are GEL Custodians and Perpetual Trustees.
• Do not use a property as collateral for another loan or property. It is best to borrow the deposit from one loan and then use these dollars as ‘cash’ for the deposit to obtain the next loan/property.
• Insist when applying for a loan that no cross collateralization be put in place.
You can learn more about the tricks the banks use by download the FREE E-Book from the Go Mortgage Website entitled: 'What the Banks Don't Want You to Know'.
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Thursday, 29 July 2010
Go Mortgage Corporation | Providing innovative home loans and lending solutions from Australia's major banks, boutique lenders and mortgage managers that put more money in your pocket. | PH 1300 855 244 | 18/10 Old Chatswood Rd, Springwood, Brisbane, Australia.