Security Swaps – Level up your portfolio

New Zealand’s property market might be challenging, but savvy investors are finding opportunities amidst the changing landscape. While tougher lending conditions and higher interest rates can make securing high-quality investment properties seem like a distant dream, a strategic security swap can unlock doors you thought were closed.

Here’s the challenge: You own a decent investment property (Property A) with built-up equity, but its potential may be maxed out. You want a better performing property (Property B), offering stronger capital growth, higher rental yields, or a more desirable location. But stricter lending rules, or for older borrowers due to reduced loan terms, might hold you back.

Enter the security swap. You leverage the equity in Property A as security for a loan to purchase Property B. Once settled, you transfer the existing mortgage on Property A to Property B, freeing up its title. Now, you’ve not only upgraded your investment portfolio with Property B’s superior potential, but you’ve managed it with a potentially lower interest rate thanks to your existing mortgage on Property A.

Emma’s case study:

Emma, a property investor, recognised that now is an opportune time to optimise her property portfolio before the market picks up. She aimed to sell a property whose value had peaked, a property acquired in 2012 – a crossed-lease half-share property for $650,000. Despite converting it to fee simple through a resource consent process, the development was limited to two dwellings due to a long driveway, despite a $1.75 million valuation (CV).

To enhance its market value in today’s home buyer’s market, Emma decided to undergo a renovation. However, the bank insisted on full repayment due to their income-to-debt ratio. The solution? A strategic security swap. They identified an 800m2 flat site in an up-and-coming area, priced much lower. This property promised superior development potential and capital appreciation.

Crucially, the security swap allowed them to retain the sale proceeds, keeping their existing mortgage and freeing up capital. Instead of maximising a limited asset, they pivoted, securing a prime investment for future growth. This innovative move not only navigated a challenging market but also positioned them for emerging trends.

Why is this relevant now?

1. Tightened lending: Age-related restrictions make qualifying for new loans challenging. Security swaps bypass this, maximising your existing equity.

2. Strategic upgrade: Trade up to a property with better capital growth, higher rental yields, or a more desirable location, boosting your overall portfolio performance.

3. Interest rate advantage: Retain the potentially lower interest rate of your existing mortgage, saving money compared to a new loan.

Before you make your move:

• Costs: Consider legal fees, possible valuations, and potential break fees.

Expert advice is essential: Consult a qualified mortgage broker and financial advisor to assess your individual circumstances, risk tolerance, and suitability for a security swap.

Remember, this strategy isn’t for everyone. But for savvy investors with existing equity and a vision for portfolio growth, it can be a game-changer, especially in a market where quality properties demand attention. So, weigh the pros and cons, seek expert guidance, and see if a security swap could be the key to unlocking a higher-performing investment future.