Cross-Collateralisation Explained

Say you own a home and want to buy an investment property using your equity. A crossed structure puts the new loan against both properties at once, so the lender holds a mortgage over the home and the investment as one combined security pool.

A standalone structure does the same job differently. One loan, usually a separate split against your home, releases equity for the deposit and costs. A second loan is secured only by the investment property. Same total debt, but each property stands on its own.

Many people don't realise they have a crossed structure until they try to sell or refinance. It's often set up at the time of purchase because it's the lender's default, and the paperwork can be easy to skim past when you're excited about buying.

Crossing gives the lender a bigger safety net. If one property falls in value, the other props up the security position. It can also mean one valuation process and a single set of documents, so it can look quicker at the time.

Occasionally crossing makes sense, for example in some construction or development scenarios. But for most everyday investors, the convenience upfront is outweighed by the inflexibility later.

It can also be offered when someone doesn't have quite enough equity in one property to cover a deposit, so the lender takes both as security to get comfortable. In that case it's worth asking whether there's a different way to structure the loans, or whether waiting a little longer would allow a cleaner setup.

The main problems show up when you want to change something.

Imagine wanting to sell your investment to fund a new opportunity, only to find the lender has revalued your home lower than expected and wants a larger share of the sale proceeds to keep the remaining loan within its limits. In a standalone structure, the sale of one property generally doesn't depend on the value of the other.

If your loans are already crossed, it can usually be fixed, though it takes a bit of work. Options include restructuring with your existing lender to separate the securities, or refinancing one or more loans to a new lender. Valuations, serviceability and fees all come into it, so we'd look at the numbers before recommending a path.

From our own experience owning property across NSW and QLD, keeping each property's lending separate has made it far simpler to sell, refinance or buy again on our own terms.

Before untangling, we'd look at your current valuations, how much each loan should be, whether you'd pass serviceability with a new lender and what fees or LMI might apply. Sometimes the best move is to restructure now; other times it's simpler to wait for a natural trigger, such as the end of a fixed rate period.