Loan Tip: What is Cross Collateralisation?

Cross Collateralisation is where more than 1 security is used for one loan. Cross securitisation is another term for it – crossing collateral or crossing security. It is the crossing of securities not loans.


Example

Nelson has a home worth $500,000 and a loan worth $200,000.

He goes out and buys an investment property for $500,000 and borrows $525,000 from the bank and the security for this loan is both the investment property and the home.


Where there are 2 loans secured by the one property this is not cross collateralisation. This is the way to still borrow 100% or more for a purchase without cross collateralising securities.


Example 2

Nelson seeks credit and legal advice and decides to avoid cross collateralising loans and to avoid this he sets up another loan against his home loan

Loan A $200,000 existing loan Secured against the main residence

Loan B $125,000 new loan Secured against the main residence

Loan C $400,000 New loan Secured against the investment property


Nelson has achieved the same result of borrowing $525,000 for the investment property but has not cross collateralised loans because each loan is secured by just one property.