Let's talk about security
Banks are greedy. They want margin, they want security (lots of it), they want all your business and all the related fees.
Let’s talk about security, sometimes referred to as collateral. Security is the asset (usually real property) you offer to a lender to take a mortgage over in exchange for borrowing the required funds. Should you not repay the loan, the sale of this asset is designed to clear your associated debt.
You’ve probably heard about cross-securitised and single security loans before, but what does it mean and how might this affect you in the future?
Cross collateralisation is a term which is used to explain a scenario where your lender will register a mortgage over more than one property (or asset) to secure 1 or more loan facilities. Essentially, they have bundled your security together to lend you the money.
A standalone (single) security loan will be secured by just the one property.
Below is a comparison of a scenario where an existing customer seeks to buy an investment property and borrow 100% of the purchase price (plus state fees) using existing equity in their owner-occupied home. Existing property is worth $500,000 and has an outstanding loan of $300,000. New purchase is for $400,000.
Cross-secured structure:
Loan 1: $300,000 Existing loan amount (owner-occupied)
Loan 2: $420,000 New Loan (total cost of investment purchase including fees)
Security: $900,000 Combined value of houses = 80% loan to value ratio (LVR)
Standalone Security Structure:
Loan 1: $300,000 Existing loan amount (owner-occupied)
Loan 2: $100,000 Loan for investment property deposit (secured only by existing home)
Security: $500,000 Existing home only = 80% loan to value ratio (LVR)
Loan 3: $320,000 New Loan for investment property
Security: $400,000 Investment property only
Cross securitisation I would refer to as being an ‘all your eggs in one basket’ scenario. If you go straight to a bank for finance, you can expect them to spruik the convenience of this structure. All this structure is doing is making their job easier upfront without considering what may be in your best interests long-term.
Should you decide to sell or refinance when cross-securitised, you are relying heavily on the lender authorising the change. In some cases, they may request a re-assessment of remaining commitments or ask to retain some additional funds to help secure the remaining loans. You could also be up for additional fees for making changes to related loans. Valuation, security variation and fixed rate break costs are all possible fees you could have to pay.
A single-security scenario provides greater control, flexibility and transparency over your finances. This method is our preference in nearly every scenario. The only real downside to single security loans is the fact that you may need to have a couple more loan splits in your portfolio. However, these splits also allow for clear identification of loan purpose and amount.
Lending criteria has tightened significantly in the past few years, you may find that your lender doesn’t have an appetite for your lending, but another does. Single security loans make it easier for you to spread your lending and take a portion to a more suitable provider with minimal fuss.
As your professional Mortgage Broker, we see the bigger picture. We will workshop your proposed scenario to ensure the lender only receives the security they need, not the security they want.
We exist to keep more money in your pocket and less in the Banks. Let us help you today.
Call Michael on 0428 873 008 to discuss your current and future lending commitments. Our service is at no cost to you.
