The hidden danger of cross-collateralisation

Wednesday, 5th Sep 2012
Categories: Finance, Newsletter

Piggy bank

A recent case study highlights a serious problem that can occur when two different properties are used to secure a single loan – a situation often referred to as cross collateralisation.

Prior to contacting Momentum Wealth, the investor had purchased an investment property and used another finance broker to arrange a loan covering 100 per cent of the purchase price and the associated costs.

The previous broker structured the loan so that both the newly purchased property and the investor’s home, which was completely unencumbered and on the market for sale at the time, were used to secure the loan.

When the investor’s home went under contract following the acceptance of an offer, the bank was notified about the pending sale. To the surprise of the investor, the bank then advised that the newly purchased property was valued less than the price the investor had paid, meaning the loan would have to be paid down to an acceptable level.

At the time of the application, the value of the newly purchased property wasn’t a concern for the bank as the loan was also secured against the investor’s unencumbered home. But now, with the home being sold, the bank demanded action.

This was unacceptable to the investor who didn’t want to have to pay down a deductible loan and so contacted the broker. When the broker was unable to provide assistance, the investor contacted us to ask if there was anything that we could do.

We contacted the bank in question and insisted that a new valuation be ordered of the recently purchased property. With the help of some sales evidence and a little perseverance, the bank agreed to increase the value of the property to match the purchase price.

We then applied to another lender so that 20 per cent of the debt could be secured against one of the investor’s other properties, which would avoid the necessity for Lenders Mortgage Insurance (LMI) or paying down any deductable debt. The new loan application was then submitted for the remainder of the debt and the cash was paid to the investor in just 14 days, a week before the property was scheduled to settle.

In the end the client was happy with the outcome. Investors need to be aware of how cross collateralisation can affect their immediate & longer term investment plans. It’s best to speak with a Broker who understands the needs of investors.