When it comes to cross securitisation (or cross collateralisation) vs stand-alone securities, borrowers are often unsure which is better suited when considering their lending structure for property investment. While each type of loan has advantages and disadvantages, it is important to get a better understanding of each before diving in and making that choice.
In this blog, we will look at cross securitisation vs stand-alone securities and what they both have on offer.
What is cross securitisation?
Although the name might sound like it refers to something extremely complex, Inovayt Finance Broker, Justin Coughlin simplifies cross-securitisation (also known as cross-collateralisation) as “having one loan that is secured by more than one property.”
Like with anything, there are pros and cons to a decision like this, so it’s time to take a look at our pros and cons list. With cross securitisation, some of the pros include:
Provides simplicity – Cross securitisation can provide simplicity and may allow you to purchase another investment property without having to have multiple individual loans. Justin says that “rather than having to do a refinance of a current property, release equity and then have another loan for the purchase, you can just apply for one new loan for the purchase which will then be secured by both the first property and the new property.”
Easier access to equity – If you have multiple properties securing a loan then you may be able to increase this loan and access the equity created if one or more of the properties have increased in value. This can be done via a single application whereas if loans are secured against individual properties, then multiple applications would be required to release the equity from each property.
It can make your finances easier to manage – Having your lending with a single institution can make your finances easier to manage and access within a single online banking portal, particularly with multiple properties. Cross-collateralisation will also reduce the total number of loan accounts required, making it easier to keep track.
Now that we’ve spoken about the pros, it’s time to look at some of the cons or risks involved with cross securitisation:
Valuations – If you have multiple properties securing a single loan then the values of all properties will have an impact on the amount of equity that can be released. If one property increases in value by $100,000 and another decreases in value by $100,000, the net change is $0 and therefore there will be no equity available to access.
Banks hold the power – If you have two properties securing a loan and you choose to sell one, the bank will then do a valuation on the remaining property to decide how much needs to be paid off the loan so that it can remain within their loan to value ratio criteria. If the value of this property is lower than expected, this may result in the loan needing to be paid down to a lower level and therefore reducing the proceeds you receive.
It’s also possible that if the sale amount doesn’t fully pay off the mortgage, the bank can force you to put in a cash contribution or sell another property to make up the amount when the settlement is completed.
You’re tied to a single lender – Having multiple different property investments tied up with the same lender means you’re more likely to see a contagion effect across all of your properties if something were to go wrong with one loan. For more information about borrowing with one or multiple lenders, visit our blog.
What are stand-alone securities?
When it comes to stand-alone securities, it is the opposite to cross securitisations that were discussed above. Stand-alone securities refer to loans that are secured by one property. For example, you may have your home loan with one lender, but your two investment property loans with another two different lenders. This approach spreads out your risk.
When looking at the pros of stand-alone securities, these are some things to consider:
You have the ability to buy and/or sell an additional property without having to alter your existing loans. Because your loans are kept separately, you can make changes to one part of your portfolio without having to make changes to your other existing loans.
Diverse loan options – Keeping your loans separate allows you to change them up if you need. This means that you can switch it up between fixed and variable rates and use a range of lenders.
There’s less risk of losing your property – If there was an issue where you defaulted on the payments on a loan the lender would then seek to repossess and sell the property securing the loan. However, this would be limited to the single property attached to that loan. By having stand-alone securities, your properties are kept separately which means you wouldn’t have to sell others to cover a defaulted loan payment. This is not completely fool proof, however, as lenders often have an “all monies clause” which allows them to access any security held by the bank if any loan is in default.
Some drawbacks that you need to keep in mind when it comes to stand-alone securities are:
Multiple loans – Having your lending structured with standalone securities will naturally involve having a larger number of individual loan accounts. There may also be equity release loan accounts secured against one property when the purpose of that loan was actually to purchase another property. This increased complexity can cause problems for borrowers who would prefer a simple structure that is easy to keep track of and manage.
So, cross securitisation vs stand-alone securities?
Unfortunately, there is no one-size-fits-all answer. Justin says he more frequently recommends stand-alone securities to a majority of his clients as the borrower has more control over their finances. Having said this, however, there can also be scenarios where cross-collateralisation can be highly beneficial.
As with all of our blogs, this is general information only and it is important to consider your own unique circumstances and consult your financial professional before making any loan structuring decisions.
For a more comprehensive understanding and to discuss the best option for your situation, chat to one of our friendly team today.