“I don’t know” that was the answer from a bank representative when I asked him how we could undo a complicated mess that a client had gotten himself into.
A few years ago, the client had cross-collateralised three investment loans – one of which was for a property in Whyalla SA.
Cross-collateralisation is where a security which is currently being used as collateral for one loan is also used as collateral for another loan. If the borrower is unable to make either loan’s repayments in time, the lender can eventually force the liquidation of either asset and use the proceeds for repayment.
Lenders like to spread loans across multiple properties; it reduces their risk level by keeping Loan Value Ratios (LVR) to a low level.
But lenders also like to cross-collateralise loans to complicate things – so much so that many borrowers find it too hard to take their business elsewhere; its hard untieing the knot.
If you are looking to buy an investment property, but have no savings, there are less complicated ways of financing the purchase. If you have plenty of equity in the property you already own then your broker can arrange a ‘top-up’ loan against that property which then becomes the deposit for your next purchase. This way the loans for the properties are much cleaner.
If you want to know more about the appropriate structure for a loan, please contact me on 1300 30 67 67.