Glossary: What is cross collateralisation?
This article is part of our Glossary Series, helping you understand some of the many acronyms you may have come across within the mortgage industry. If you come across a term you don’t understand, get in touch and we will add it to our list of definitions.
Cross collateralisation is a complex term for a borrower offering two properties as security for a new loan.
It keeps the loan to value ratio (LVR) as low as possible, which increases the likelihood of securing the loan, and helps to avoid other costs like lenders mortgage insurance (LMI).
For example, Irene owns her home which is valued at $300K. She wants to buy an investment property for 300K, but she has no deposit so therefore needs to borrow the full purchase price plus stamp duty plus costs – which would be approximately $315K.
In terms of security, the bank won’t lend $315K against the investment property alone. But if she offered her home as well as the investment property as security for the new loan, then her potential equity would be $600K, giving an LVR of 52.5%, which would be acceptable to the lender.
Irene can then offer her home as additional security for the loan and get the amount she needs to be able to purchase the investment property.
