Cross-collateralisation can be a powerful tool for property investors who want to leverage equity from existing properties to fund new investments. By using the equity in one property to secure a loan for another, you can potentially accelerate portfolio growth and reduce upfront costs. Here’s a closer look at how this strategy works.
What is Cross-Collateralisation?
Cross-collateralisation is when multiple properties serve as collateral for a single loan, allowing you to access more financing than a typical one-property mortgage. For example, you could use the equity in your current home to secure a loan for a new investment property. This setup provides a combined equity pool, expanding your borrowing capacity with minimal cash savings.
How Does Cross-Collateralisation Work?
Let’s look at a case in point.
Imagine Pete and Deb own a home worth $1 million with a $600,000 mortgage. They want to purchase an $800,000 investment property, and instead of dipping into their savings, they decide to cross-collateralise. By securing both properties under one loan, they can cover the $800,000 investment without paying Lender’s Mortgage Insurance (LMI), as their combined Loan-to-Value Ratio (LVR) remains below 80%.
Benefits of Cross-Collateralisation
- Access to Increased Borrowing Power
Leveraging existing property equity for new purchases lets you reserve your savings for other investments or expenses. - Reduced Interest Rates
Cross-collateralisation can lower your overall LVR, potentially helping you secure a more competitive rate. Credit Star rewards this with attractive rates as you pay down your loan. - Potential Tax Deductions
Equity used for investment purposes may also provide tax advantages. Be sure to consult a tax expert to confirm eligibility and maximize benefits. - Simplified Management
Managing properties under a single loan structure streamlines the process, with one lender, account, and set of statements for easy tracking.
Considerations and Potential Drawbacks
- Equity Limitations
When properties are cross-collateralised, equity becomes tied to the combined value, which can limit access if one property’s value decreases or if you need to sell one of the properties. - Refinancing Costs
Changes, refinancing, or selling within a cross-collateralised setup may incur costs for revaluations, though Credit Star provides a fee-free structure to minimize these costs. - Increased Financial Risk
Multiple properties tied to a single loan increase the stakes, as changes to one property may affect the entire portfolio. Consider this when deciding if this strategy suits your financial goals.
How Credit Star Can Support Your Strategy
Credit Star offers fee-free features and flexible structuring to make cross-collateralisation work for you. Our home loan products allow up to 10 split loans, so you can designate splits by purpose—such as one for owner-occupied and another for investment. Our multi-offset accounts further help you set aside funds for future investments, all without additional fees.
Connect with Credit Star’s Investor Experts to discuss your unique portfolio goals and find out if cross-collateralisation aligns with your financial strategy. With Credit Star, you can start maximizing your portfolio potential today!
