i just saw an article in this month's API magazine where Margaret Lomas said that x-collateral is not a bad thing at all because she said that even if you did not pledge your property, as long as you owe bank they can still force you to sell your assets to pay up.
This is only half true.
At the end of the day the banks could force you to sell all assets to satisfy a judgment. But having properties stand alone along the way allows you to start selling on your own terms if and when you choose. Mortgaging a property allows the bank to take possession much quicker and they could choose any property they hold as security.
Example
Mr Bumburp owns 3 properties valued at $100,000 each. His loans are $80,000 each and cross collateralised.
Mr Bumburp suffers from a heart attack (due to a build up of wind). His 2 tenants leave and he can't pay the loans. His third tenant is still paying the rent.
Bumburp sells property B for $80,000. Values have fallen and he needed a quick sale. Elated, his heart starts beating a few extra beats because of the sale. He sends in the discharge of mortgage forms only to find out the bank wants to revalue his remaining 2 properties before they release the mortgage. All values come in a bit lower, say $90,000 each.
Since his remaining loans are $160,000 and the values are $180,000 the bank will only release the mortgage if the remaining loans are 80% or less LVR. This LVR sits at 88.9% so the bank wants the loan reduced to $144,000 (80%) by reducing the loans by $16,000. Or LMI would need to be applied for and the premium paid. Mr Bumburp is not working and could not qualify for LMI.
The sale falls through because of the delay and the bank no releasing the mortgage. Mr Bumburp now gets even more behind and has a second heart attack - his wife also decides to leave him he treads in dog poo on the way to the postoffice.
But, if Mr Bumburp did not cross collateralise things would have turned out much differently. His sale would have proceeded. The discharge of mortgage would have only depended on the repayment of the loan attacked to the property being sold.
He would still have the other 2 properties and loans as is and he could sell these properties independantly. He could, for example, keep repaying the loan on one of them and only worry about the defaults on the other (assuming his cashflow not enough). If he could not pay he could strin things out for months and this would allow the sale of one or more of the remaining properties.