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4 reasons to avoid Cross Securitisation
or Cross Collateralisation
Cross
securitisation is when your lender has more than one property listed as
security for a loan and is often the default way that lenders set up loans that
involve multiple properties.
Most of
the issues with a loan being cross securitised only become apparent when your
circumstances change. Here are some
examples of the potential complications that can come from having your loans
cross securitised.
1. If you sell one of the properties your lender can
decide how the proceeds are used
· Your
lender may insist that all proceeds of the sale go towards paying down the loans.
· Your
lender may decide that receiving all of the proceeds of the sale is not enough
and that they also require you to provide additional funds before releasing the
security.
· You will
need to re do all of the loan documents that list that property as a security.
2. If you fall behind on your loan payments your
lender decides what action to take.
· Your
lender can choose to sell some or all of the security properties listed.
· Your
lender will choose which of the security properties to sell.
· This
could mean selling your home and keeping an investment property when you would
prefer to do it the other way around.
3. It is more complicated to access equity available
in a property.
· To top up
your loan and release equity you will have to organise (and pay for) valuations
for all of the properties that are security for the loan.
· If one property
has gone up in value and the other has gone down by the same amount you will
not be able to access any extra equity.
4. Refinancing some of your debt to another lender will
be more difficult
·
You will first need to restructure the existing
loans with the current lender to remove the property you wish to use as
security for the new loan from all other loans.
·
Then you will be able to re-finance the newly split
out loan to your new lender.
·
The alternative is to move all of the loans to an
alternative lender.
In most
instances Cross Securitisation can and should be avoided to maintain greater
loan flexibility into the future. The
best way to achieve this is to ensure that each loan only lists one property as
security.