In the world of mortgages, there are different loan structures that borrowers can choose from based on their needs and goals. Two common options are cross securitisation and stand-alone securities. Each has its own advantages and considerations, and it’s important to understand the distinctions between them to make an informed decision. In this blog post, we will delve into the differences between cross securitisation and stand-alone mortgages, highlighting their features, benefits, and potential drawbacks.
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Cross Securitisation: Leveraging Multiple Properties for Financing
Cross collateralisation, also known as cross securitisation, is a loan structure where a loan or loans are secured by two or more properties. This approach allows borrowers to finance the entire purchase price of a property, including associated costs. Let’s explore how cross securitisation works through an example.
Imagine you’re interested in buying an investment property worth $500,000. Luckily, you already own your home outright, valued at $1 million. If you didn’t own a property, you would typically need to provide a 20% deposit plus additional fees such as stamp duty.
However, because you own your home, by cross-securing both properties, you can borrow the purchase price plus associated costs. This means you could borrow, let’s say, $525,000, to cover all costs. This loan would be secured against both the property you intend to purchase and your home.
To qualify for this type of loan, you would need to meet certain requirements. The bank typically conducts valuations on both your home and the investment property. The amount of equity you have in your existing property will determine if you are eligible for this type of loan setup.
In this example, we have two properties valued at $1.5 million in total. The first property is an investment property that we are acquiring for $500,000, and the second property is our existing home valued at $1 million. Through cross securitisation, the bank holds a combined value of $1.5 million properties. In this scenario, we are only borrowing $525,000, which, based on the total equity held, would mean a loan-to-value ratio of 35%.
The Advantages and Considerations of Cross Securitisation
While cross securitisation offers the benefit of financing a property without the need for additional deposits, it’s important to consider some potential drawbacks. One issue with this loan structure is that when you decide to sell one of the properties, the bank will conduct a revaluation of the remaining properties. This evaluation is done to ensure that the bank’s lending margins are adequately maintained after the sale. As a result, you may be left with less money after the sale of your home.
Stand-Alone Securities: Focusing on Individual Property Security
In contrast to cross securitisations, stand-alone securities refer to loans that are secured by only one property. With this approach, borrowers use a single property as collateral for a loan. Let’s revisit our previous example to illustrate how stand-alone securities work.
Instead of having one big loan secured by two properties, with stand-alone securities, you would have two separate loans, each secured by each property individually. In this scenario, the first loan would be $400,000, secured against an investment property valued at $500,000. This loan represents 80% of the property’s value, allowing you to avoid paying mortgage insurance as you would through cross securitisation. The second loan of $125,000 would be secured by your home. Overall, you would still borrow a total of $525,000, but with stand-alone securities, you have the flexibility to work with different banks for each loan.
Benefits and Considerations of Stand-Alone Securities
One key advantage of stand-alone securities is the opportunity to collaborate with multiple lenders instead of being dependent on a single provider. This diversity allows you to distribute the risk across different financial institutions. In the event of a loan default, the risk is contained to the specific property linked to that loan, mitigating the need to liquidate other properties to compensate for defaulted payments.
However, it’s crucial to bear in mind that lenders often have an “all monies clause.” This clause allows the banks to take possession of any collateral held by the lender if a loan defaults, even if you have loans with different banks within the same group. Therefore, it’s essential to consider this factor and work with a knowledgeable mortgage broker to set up your loans correctly and minimise risk.
Choosing the Right Loan Structure for Your Needs
When deciding between cross securitisation and stand-alone securities, there is no definitive right or wrong choice. The loan structure you choose should align with your long-term goals and be based on what makes the most sense for your unique circumstances.
Cross securitisation often simplifies your finances by granting access to equity without needing to have extra home loan accounts. Additionally, it may lead to lower home loan interest rates due to your overall loan-to-value ratio.
On the other hand, stand-alone applications allow you to have a clear understanding of what you’ll be left with when you eventually sell. For investors, this option comes with an inherent risk mitigation function, making it a favourable choice.
To make an informed decision, it’s advisable to work with a reputable mortgage broker who can guide you through the pros and cons of each option and help structure your loans accordingly. At Hunter Galloway, we offer our mortgage brokering services throughout Australia without any fees. Get in touch with us for a free assessment or give us a call at 1300 088 065 to receive expert assistance in understanding these loan structures and finding the right solution for your needs.
Frequently Asked Questions
What is cross-securitisation?
Cross-securitisation, also known as cross-collateralisation, is a loan structure where multiple properties are used collectively as collateral for one or more loans. This means that all properties are linked to the same loan agreement.
What are the advantages of cross-securitisation?
Increased borrowing capacity by pooling the equity of multiple properties.
Simplified management with a single loan covering multiple properties.
What are the disadvantages of cross-securitisation?
Limited flexibility, as selling or refinancing an individual property becomes more complex.
Increased risk exposure, where defaulting on one loan can jeopardize all properties used as collateral.
What are stand-alone securities?
Stand-alone securities refer to loans where each property secures its own individual loan, keeping them separate from one another.
What are the benefits of stand-alone securities?
Greater flexibility, allowing the sale or refinancing of a property without affecting others.
Risk containment, as defaulting on one loan does not directly impact other properties.
What are the drawbacks of stand-alone securities?
Potentially higher costs due to managing multiple loans.
Equity access limitations, requiring additional applications and approvals to use equity from one property for another purchase.
How do I choose between cross-securitisation and stand-alone securities?
The decision depends on your financial goals, risk tolerance, and investment strategies. Consulting with a mortgage broker or financial advisor can provide personalized guidance tailored to your specific circumstances.
Can I switch from cross-securitisation to stand-alone securities?
Yes, it’s possible to restructure your loans from cross-securitisation to stand-alone securities. However, this process may involve costs and require lender approval. Consulting with a mortgage broker can help navigate this transition.
Are there tax implications associated with these loan structures?
Tax implications can vary based on individual circumstances and the specific loan structure. It’s advisable to consult with a tax professional to understand the potential tax consequences.
How does cross-securitisation affect my ability to sell a property?
Selling a property under cross-securitisation can be more complex, as the lender may require revaluation of the remaining properties to ensure adequate security. This could impact the proceeds you receive from the sale.
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