I‘m constantly hearing the negative views of property experts in regard to cross collateralisation and find that I am forever at odds with this view. You may have heard all sorts of opinions about whether it is a good thing or not, with some ‘experts’ claiming that it should never be done.  I certainly do not agree with this, and believe that the drawbacks touted by these experts are ones that cannot be avoided, even if you separately collateralise every property you own. 

You see, when you borrow money you must pay it back. The bank holds collateral security in the form of your property to ensure that, if you don’t repay your debts, it has a way to recoup what you owe it.

In the unlikely event that what you owe the bank exceeds what it can make by selling the security it holds, the ‘all monies’ clause in most loan contracts means that the bank will require you to find the money somewhere else. This can, and will, include you selling anything else you have in order to repay the bank in full, even if your additional assets are presently securitising loans with another lender, or a spate loan with that same lender. This means that there is no protection in having your properties held by many different banks, as your lender’s power to recover monies due from you extends beyond the security it holds. 

There are other disadvantages with having loans all over the place and separately collateralised, most notably the added complexity of accessing increased property equity for further leveraging.

If all of your properties are cross collateralised, and each of those properties grows by a small amount, all of those small amounts, when added together, can easily add up to be enough to form a deposit on another property. 

Where each property you own is held by a different bank, or as part of a separately collateralised structure, then a single property must increase enough in value to generate a deposit to buy more property without having to re-mortgage the whole package or take some other complicated action. 

Of course the major drawback is that, if you wish to borrow more money and the bank decides to revalue everything, then any properties which have lost value could create a situation where you won’t be allowed to do this.

I have also found that, in recent times, I have been able to ask my bank to only re- value those properties which I know have gone up in value, and this guards against an across the portfolio revaluation resulting in negative growth, where properties I have bought may not have done as well as I would have liked (yes!  It happens, even to me!). You can go some way toward guarding against this by learning how to research well and investing in those areas with solid growth drivers. 

In my opinion, choosing not to cross-collateralise will not provide protection against having to sell more than what the bank holds in the event of difficulties. It will, however, make it harder for you to easily capitalise on the increasing values and will be more costly every time you need to adjust or increase your loan.