When you’re navigating the world of property investment or finance in Australia, you might come across a term that sounds complex but is actually quite common — cross-collateralisation.
What Is Cross-Collateralization?
Cross-collateralisation is when a lender uses more than one property as security for a single loan or multiple loans. In other words, your assets (usually properties) are linked together by the lender to support the money they’ve lent you.
A Simple Example:
Say you already own Property A, and you want to buy Property B. Instead of using just Property B as security for your new loan, the bank uses both Property A and Property B as collateral.
This is a cross-collateralised loan.
Why do banks do this? The banks would prefer the extra protection. Suppose the following scenario. You purchase Property A for $500,000 with a $400,000 loan. 2 years later you wish to purchase property B for $1,000,000 with a $800,000 loan. The bank may be happy to lend you another $800,000 provided that Property A is also security (along with Property B) for the new $800,000 loan. Why does the bank do this? If you are unable to pay off the $800,000 loan the bank will be able to sell both properties A and B to pay off the $800,000 loan – giving them the extra security and protection.
Why Do People Use Cross-Collateralization?
There are a few reasons someone might choose (or be offered) a cross-collateralised setup:
- Maximise borrowing power: By combining the equity in multiple properties, you may be able to borrow more. The more security the bank has, the more they may be willing to lend.
- No cash deposit needed: If you don’t have enough savings for a deposit on a new property, you can use the equity in an existing one. For example, suppose you purchase property A for $400,000 with a loan of $320,000. If in 10 years time the property is worth $1,000,000, the bank may be willing to lend you up to 80% of the value of this property for another asset purchase. This means that the bank may be willing to lend you up to $800,000 ($1,000,000 x 80%), or another $480,000 ($800,000 less $320,000 = $480,000). This $480,000 can be used as a deposit for another property. If this sounds a little confusing, please contact your property tax accountant, like Nobel Thomas, for a further explanation.
- Convenience and extra security: Most banks prefer this structure because it keeps all the lending under one umbrella and gives them additional security as explained earlier.
The Risks of Cross-Collateralization
While it can be appealing on the surface, cross-collateralisation has several potential downsides:
- Reduced flexibility
If you wish to sell one of the properties, the lender may not release any of the money and use the money to pay down your loans. For example, suppose you purchase Property A for $400,000 with a $320,000 loan. Suppose 5 years later, you purchase Property B for $600,000 with a $480,000 loan with the bank taking Property B and Property A as security for this new $480,000 loan. Suppose in 10 years time, Property B is worth $1.5 million and you decide to sell it. Upon selling, the bank will use the proceeds of the sale to pay off the original $480,000 loan PLUS to pay off the $320,000 loan for Property A. This will then leave you with $700,000 ($1.5 million less $480,000 less $320,000). The bank will do this because the loans are cross collaterised.
- Increased exposure
If one property drops in value, it can affect your entire loan portfolio. The lender has claim over all linked properties and may decide to sell your properties if allowed to do so (contact your mortgage broker or property tax accountant to review your bank covenants for you).
- Harder to refinance
Changing lenders later can be complicated and costly when multiple properties are tied together.
- Valuations matter more
If the bank revalues one of your properties lower than expected, it might impact your ability to access equity — even if the other properties are performing well.
Cross-Collateralization vs Standalone Loans
Instead of cross-collateralising, many savvy investors opt for standalone loans, where each property is financed and secured individually.
Standalone loan benefits:
- Easier to sell or refinance properties independently
- Less risk exposure across your portfolio
- More lender flexibility
However, you might need a larger cash deposit or more upfront equity to keep the loans separate.
Should You Use Cross-Collateralization?
It depends on your financial goals, risk appetite, and property strategy. For some, cross-collateralisation helps them grow quickly. For others, it becomes a trap that limits flexibility down the line.
Before committing, it’s smart to:
- Speak with a mortgage broker or business accountant Melbourne
- Understand the long-term implications
- Explore alternative structures, like standalone loans or using guarantor options
Final Thoughts
A cross-collateralised loan in Australia can be a powerful tool — but it’s not for everyone. While it might help you access equity and expand your portfolio faster, the loss of control and added complexity might not be worth it in the long run.
As always, understanding the fine print and getting personalised advice from a property tax accountant is key before signing on the dotted line.
Want to know if cross-collateralisation is right for your situation? Chat with a business accountant Melbourne, mortgage broker or financial planner — they can walk you through your options and help you structure your loans to suit your circumstances.
