19 Jun PROS and CONS of Cross-Collateralisation
Buying a home for living in yourself or as an investment property can be a stressful time. Not only there are many different hoops you need to jump through, paper work to sign and options to consider, there are also different processes and options available for obtaining a mortgage. The decision on which way to go with depends on your situation at the time, your future plans and also your financial position. One of the option when choosing to purchase a property is cross-collateralisation.
What is Cross-Collateralisation?
Cross-Collateralisation is when you use one property that you already have as the security for another property. This is a popular choice for those who are looking into purchasing a second property as an investment property.
The way in which this works is that once a portion of the home loan in the first property is paid off, the equity in that property is used to access the additional property.
As with all options, there are always pros and cons when choosing this option.
Some of the PROS and CONS includes:
Lower Interest Rate
As you are not taking out a second investment home loan on the new investment property, you are able to have both properties managed under a single home loan through the owner occupied property.
Many lenders will allow you to complete the cross-collateralisation under the lower interest rate of the owner occupied home loan. It may not seems like savings if the interest rate is only 1% or 2% different. However, it does adds up over the years of the loan. You can use this to your advantage and find a competitive home loan interest rates available in the market.
Greater Tax Benefits
Because the new investment property has been purchased using the equity of an existing property, it is actually a 100% tax deduction, and the beauty is, you are also still able to claim tax deductions on the investment property. Hence you are accessing the benefits of both an owner occupied property and an investment property whilst keeping your costs down as much as possible.
When there are benefits, there are also at times downfalls. Cross-collateralisation can become messy quite quickly and the untangling and sorting out of the issues can be a nightmare at times due to having to then separate the different properties to dissolve the issue.
The old saying goes ‘Don’t put all your eggs in the same basket’ and many investment owners swear by this. This is where having a cross-collateralisation can be an issue. If there is a downturn in the market, even though you may receive a capital gain from one property, the loss from the other property may make your net value significantly lower.
Banks Can Have More Power
If it comes to the unfortunate event where you are unable to pay your mortgage, the bank can determine where the proceeds of sale are distributed for the covering of your mortgage.
They have the power to decide which property to sell, where funds are allocated and how the loan will be covered with the proceeds from the sale. This means that you may be forced to sell your family home rather than your investment property.
Properties Re-valued For Refinancing
If you decide at any point to refinance your loan or switch to another lender, you will need to have all the properties that are covered under the loan to be re-valued before continuing with the refinancing. This can be a long process and it means that you need to have received a good outcome on all properties in order to be able to continue.
Before deciding should you cross-collateralise your new investment property, give us a call at 0488 814 148 for a chat to see how we can work together to work out what is right for you and your situation.