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The fine print - Cross securitisation

Last Updated: Sep 17, 2014 03:16PM AEST
The purpose of this article is to discuss the rationale for using cross securitisation as a means of financing investment property.

Cross securitisation (also referred to as cross collateralisation or interlocking securities) describes the situation where a loan is secured by more than one property.


A common example is where an investor has equity in a home mortgage and decides to purchase an investment property. The new loan for the investment property can be secured by both the investor's home and the new investment property. If a cross securitization approach is continued as a property investment portfolio increases, the result can be that all property assets are pooled as security for all loans.

An advantage of cross securitization is that a portion of the value of an existing property can be utilized to support additional borrowing for investment. Pooling equity in this way can be a pathway to growing the portfolio.

Another plus is that for larger borrowings, the lender may offer a discount interest rate if the loan is cross-secured. 

There can also be disadvantages with cross securitization in that the borrower can lose flexibility, control and negotiating power in dealing with individual properties and loans. For example, in cases where a cross-secured property is sold, the lender may require that the sale proceeds be used to settle or reduce other outstanding loans or that remaining properties are re-valued at the owner's expense.

Another issue with cross securitization can arise if an investor wants to take advantage of a lower rate from another lender for a particular investment loan or requests the existing lender to match the offered rate. There is little flexibility to deal with a property on an individual basis - an owner wanting a better deal may be forced to refinance all of their loans to a new lender at considerable cost and complexity, especially if this involves break fees on fixed-rate loans.
 

My Knowledge tips

  1. Cross securitization (also referred to as cross collateralization or interlocking securities) describes the situation where a loan is secured by more than one property.
  2. A common example is where an investor has equity in a home mortgage and decides to purchase an investment property. The new loan for the investment property can be secured by both the investor's home and the new investment property.
  3. An advantage of cross securitization is that a portion of the value of an existing property can be utilized to support additional borrowing for investment.
  4. There can also be disadvantages with cross securitisation in that the borrower can lose flexibility, control and negotiating power in dealing with individual properties and loans.
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