Cross Securing vs Stand Alone Mortgages

I wanted to offer some clarification on cross securing vs stand alone mortgages when obtaining finance for a new property.

CROSS SECURING
This means the bank you are mortgaging your property with is taking security over A) the property you are purchasing AND B) your existing property or potentially your whole portfolio of properties if they are all with the one lender. The danger with this is people are unknowingly getting themselves into a tangled web and when it comes time to liquidate and sell off one property, issues arise. One of the issues with cross securing is explained in a NZ Herald article I read recently, where Liz Brown from the Banking Ombudsman was interviewed.

"When people buy two or more properties, they think one loan belongs to each property and, if they sell one, only that loan has to be repaid." she says.

"But normally the bank will have taken security over all their properties for all of their debt. And, particularly if they don't have much equity left in the properties, the bank is within its rights to ask the customer to reduce that debt as well as pay back anything they took out in the first place to buy the property they have now sold."

Brown says while this is legitimate, she is concerned that banks are failing to tell people they plan to do this until long after they have made their plans and commitments based on the expectation of getting more from the sales than the bank leaves them.

STAND ALONE
If possible, always try to insist new mortgages are only secured against the new property. Sometimes this will not work due to cashflow or lender criteria reasons but wherever possible, re-finance existing properties to pull out enough cash so you can use this as the deposit (work off 20% needed here) to purchase the new property. That 20% deposit you have pulled out from the existing property/ies will grant the new property its very own mortgage at 80%, meaning no cross securing is done and the properties are stand alone.

Some lenders only have the cross securing option and you don't actually get a choice in the matter. However some lenders do have this option so it certainly pays to ask the question up front.

This is all more reason why you should spread your mortgages around different lenders so again, you don't end up in a tangled mess like you can if you have all your eggs in one basket.