Cross-Securitisation Vs Stand-Alone Securities (2023)

If you’re a property investor looking to secure your next loan, you must consider all your options. Choosing between cross-securitisation (or cross-collateralisation) and stand-alone securities depends on your individual investment goals, your current financial situation, and the conditions of your current securities.

In this article, we’ll cover the potential benefits and drawbacks of both types of loans so that you can make an informed decision on your next investment.

What is cross-securitisation?

Cross-securitisation (also known as cross-collateralisation) is when more than one property is used to secure a loan or multiple loans. For instance, if someone owns sufficient equity in their home and wants to buy another property, they could finance 100% of the investment property price plus any other purchase costs.

It’s not typically possible to borrow 100% of the stand-alone security value, and you’ll need to offer a second security for the loan. With cross-securitisation, the loan would be secured by the investment property being bought and the homeowner’s existing property.

So, in simple terms, cross-collateralisation is when you take out one loan with two security properties that are tied together.

When is cross-securitisation useful?

Cross-securitisation (or cross-collateralisation) involves using multiple properties to secure singular or multiple loans with the same lender. But when is cross-collateralisation beneficial for property investors?

When purchasing multiple properties

If a property developer is purchasing more than one investment property for their property portfolio, cross-securitisation (or cross-collateralisation) can effectively pool them together to obtain a larger investment loan with the same lender. This can be particularly advantageous if the investor wants to finance several projects simultaneously.

Buying an investment property

Cross-collateralisation can be used to manage the cash flow of multiple investment properties. By combining more than one investment property, the investor can negotiate the loan structure for more flexible repayments or use the cash flow from one property to finance the others.

How does cross-securitisation compare to stand-alone securities?

Unlike cross-collateralisation loans, stand-alone security refers to when one property is used to secure a new investment property through a loan or mortgage. For instance, an investor may have an owner-occupied property loan with one lender but two or more properties with different lenders.

Stand-alone securities offer a simpler loan structure since a property developer can focus solely on the risks associated with their new investment property. However, unlike cross-collateralisation, stand-alone securities may result in higher interest rates and a less flexible loan structure.

What are the benefits of cross-securitisation?

Cross-collateralised loans offer many benefits to property investors, including:

1. Increased borrowing capabilities: By using multiple properties as collateral, borrowers may access larger investment loans than they would with a traditional home loan.
2. More flexibility: Cross-securitisation offers greater flexibility in the types of properties eligible for collateral, including investment properties, commercial properties, and (sometimes) empty land.
3. Competitive interest rates: A cross-collateralised loan gives borrowers lower interest rates than an unsecured home loan since the lender takes on less financial risk.
4. Simplified loan management: Cross collateralisation allows borrowers to bundle their loans into one easy-to-manage package, so they only need to make one monthly repayment.

Potential drawbacks of cross-securitisation

1. Limited selling ability: Since cross-collateralised loans use multiple properties as collateral, investors can find it challenging to sell or refinance individual homes. Depending on the lender, you may need to keep all properties as collateral until the loan is repaid.
2. Increased risk: Using multiple properties as collateral means borrowers put more assets at risk if they default. So, if the borrower cannot meet their loan repayments, they may be forced to sell their properties and will miss out on the sale proceeds.
3. Difficulty in refinancing: If a borrower decides to refinance their cross-collateralisation home loan, they may encounter difficulty finding one lender willing to take on multiple properties as collateral.

What are the benefits of stand-alone securities?

Stand-alone securities are beneficial for investors looking to purchase a new property for the following reasons:

1. Simple loan structure: Stand-alone securities are simple and easy to understand, as they are typically backed by a single asset or cash flow stream, such as a single mortgage or a pool of credit card debt.
2. More transparency: Stand-alone securities are typically more transparent than other loans (cross-collateralised) as assets are easy to value.
3. Diversified portfolios: By allowing investors to invest in a range of assets, stand-alone securities can allow individuals to cultivate a diverse portfolio of properties, from owner-occupied to commercial.

Potential drawbacks of stand-alone securities

Investors must consider the potential drawbacks of stand-alone securities when investing in property. There are several potential downsides, including:

1. Concentration risk: Property stand-alone securities are often of a similar property type and concentrated in the same area, which can leave investors exposed to a higher level of risk, particularly if there is a downturn in the local market.
2. Economic risk: Stand-alone securities for property can be sensitive to changes in economic conditions, impacting the level of cash flow.

Consider your best investment loan options with Lendstreet.

If you want to purchase a second home or diversify your property portfolio, consider consulting with a professional mortgage broker to assess your best options.

At Lendstreet, we’re experts in helping you find the best investment loans to reach your financial goals. Contact one of our professional mortgage brokers today for professional advice.

FAQs

Is cross-securitisation or stand-alone securities better for purchasing investment property?

Whether cross-securitisation or stand-alone securities are best for you depends on your risk tolerance, financial situation, and investment goals. For personal advice, consult with a mortgage broker.

What is an investment home loan?

An investment home loan is a type of loan that is used to purchase or refinance an investment property. They can be used to buy various property types, from commercial to short-term rentals.

Can I keep the sale proceeds of a property when taking out a cross-securitisation loan?

When taking out a cross-securitisation loan, lenders will typically require that borrowers give lenders a claim over all properties used as security. The proceeds of any sales may be used to pay off the outstanding loan balance.