Written byCross-collateralisation is a lending arrangement where one lender holds more than one of your assets as security, or one asset for more than one loan, tying them together.
Also known as: cross-collateralization, cross-securitisation, cross security
Key points
- Every asset in the arrangement supports every loan, so the loans stop being separate deals even though they have separate account numbers.
- Lenders like it because the combined loan to value ratio looks safer than each loan judged on its own.
- Selling one asset gets complicated: the lender can apply the proceeds to the whole debt rather than just the matching loan.
- Untangling it later usually means a revaluation or refinancing one loan away to another lender.
How cross-collateralisation works
Normally one loan sits against one asset. Under cross-collateralisation the lender ties the assets and the loans together, so each asset stands behind all of the borrowing. A mortgage over your home might also secure the loan on an investment property, or one business facility might be secured over three excavators at once.
Nothing on your statements announces it. The clue is in the loan documents: the security schedule for a loan lists more than one property or asset, or the same asset appears against several accounts. If the lender can also apply proceeds from one asset to any other debt you owe it, the loans are linked.
The risks for borrowers
The biggest risk shows up when you sell. Because the lender holds security over everything, it decides how much of the sale proceeds it releases and how much it applies to the remaining debt. A sale you expected to free up cash can end up paying down a loan you were happy to keep.
The second risk is spread. If one asset falls in value or one loan falls behind, the lender can look at the whole pool. That can trigger a revaluation, a request for more security, or in a serious case repossession of an asset that had nothing to do with the problem. Being tied to one lender also makes it harder to move part of your borrowing elsewhere.
How to avoid or unwind it
Ask the question before you sign: which assets secure this loan, and does this loan also secure anything else? Lenders will often write standalone security if you raise it early, particularly when each asset carries enough equity on its own.
Unwinding an existing arrangement means asking the lender to release one asset, which usually needs a fresh valuation and a check that the remaining loans still sit inside policy. If the lender will not release it, the alternative is moving one loan to another financier. Brokers deal with this regularly. Expect valuation and discharge fees plus the paperwork on the new facility.
Example
A cafe owner already has a home loan. She borrows again to fit out her cafe, and the bank takes both her home and her investment unit as security for the two loans. Two years later she sells the unit to release cash for a second site. Because the loans are cross-collateralised, the bank applies most of the sale proceeds to the home loan before it releases the title, and she is left with a much smaller deposit than she planned. Had the loans been secured against her home alone, the unit's sale proceeds would have gone to her instead of paying down the home loan.
Not to be confused with
- Security (collateral)
- security is the lender's interest in one asset, while cross-collateralisation links several assets and loans together
- Personal guarantee
- a guarantee adds a person's promise to repay, not another asset to the security pool
Frequently asked questions
How does cross-collateralisation work?
One lender takes security over more than one of your assets, or takes one asset as security for more than one loan. Each loan is backed by everything in the pool, so the lender can look to any asset if you fall behind, and it controls what happens when you sell one.
How do I know if my loans are cross-collateralised?
Check the security schedule in each loan contract. If a single loan lists more than one property or asset, or the same asset appears on several loans, they are linked. Your lender or broker can confirm it in writing, and a title search will show who holds what.
Is cross-collateralisation bad?
It is not automatically bad, but it costs you flexibility. It can help you borrow when one asset alone is not enough security. The trade off is that selling, refinancing or moving one loan elsewhere needs the lender's agreement, and the lender controls where sale proceeds go.
Can you undo cross-collateralisation?
Often yes. You ask the lender to release one asset and secure the loans separately, which usually needs a current valuation and enough equity in each. If the lender declines, the common fix is refinancing one loan to another financier. Both routes involve valuation and discharge fees.
Why do banks cross-collateralise loans?
It lowers their risk. Pooling the security means the overall loan to value ratio looks stronger than each loan alone, so they can lend more. It also keeps all of your borrowing with them, because moving one loan requires their consent to release the asset behind it.
Related terms
Security (collateral)
Security (collateral) is an asset or legal interest a borrower grants a lender, which the lender can take and sell to recover the debt if the borrower defaults.
Read definitionCollateral risk
Collateral risk is the chance that an asset pledged as security fails to cover the exposure because it falls in value, cannot be sold quickly or cannot be enforced.
Read definitionMortgage
A mortgage is the legal charge a lender registers over property to secure a loan, giving it the right to sell the property if you default.
Read definitionLoan-to-value ratio (LVR)
A loan-to-value ratio (LVR) is the amount you borrow as a percentage of the value of the security, usually property, and a key measure of lending risk.
Read definitionRefinancing
Refinancing is replacing an existing loan with a new one, from the same or a different lender, to change the interest rate, term or features, or to release equity.
Read definitionPersonal guarantee
A personal guarantee is a legally binding promise by an individual, usually a director or business owner, to pay a creditor if the borrowing business or person defaults.
Read definitionGo deeper
Sources
This article is general information only and is not financial advice.