If you’re happy with your current home loan and want to avoid the hassle of applying for a new one, a security swap could be just the solution you’re looking for.
Also known as a substitution of security or loan portability, security swapping lets you hold onto your original mortgage while switching the security attached to it from your old home to your new one.
Sounds convenient, right? Let’s explore what a security swap is, how it works, and how a mortgage broker can help you through the process.
What is a security swap?
A security swap is essentially a financial arrangement that allows you to transfer the property securing your current home loan to a new property.
So instead of going through the rigmarole of paying off your existing loan and applying for a new one, you simply keep the same loan and “swap” the property acting as collateral.
This option can be a time saver for homeowners selling their current place and buying another. Particularly if you want to hold onto your loan terms, avoid break costs, or just keep things simple during a potentially stressful time.
How does a security swap work?
Here’s a quick overview of how the security swap process typically unfolds:
1. Valuation of the new property
First, your lender will value the new home to ensure it meets their lending criteria and maintains an acceptable loan-to-value ratio (LVR).
Essentially, they’re checking that the new property is worth enough to secure the loan.
2. Simultaneous Settlements
The sale of your current home and the purchase of your new home usually need to happen at the same time.
This ensures your mortgage remains continuously secured by a property, so there’s no gap in the process.
3. Transfer of Security
Once both transactions are complete, your lender will transfer the security from your old home to the new one. Essentially swapping out the properties without the hassle of applying for a brand-new loan.
Why consider a security swap?
A security swap comes with several advantages, making it an appealing option for many homeowners:
- Time and effort savings
Security swaps can save you a lot of time and effort by letting you skip the paperwork and admin of applying for a new loan.
- Avoiding break costs
If you’ve got a fixed-rate loan, paying it off early to switch to a new loan might result in break costs (early repayment fees). A security swap helps you dodge these fees while letting you stick with your existing loan terms.
- Keep familiar loan terms.
If your current home loan suits your needs—whether it’s the repayment schedule or interest rate—a security swap allows you to keep those familiar terms without the need for a new loan agreement.
What Are the Downsides?
Of course, no option is without its drawbacks. Here are a few challenges to be aware of with security swapping:
- Simultaneous settlements requirement
One of the biggest hurdles is timing—your old home and your new home need to settle at the same time. If you can’t line up the sale and purchase perfectly, this option might not work for you.
- No increase in borrowing
Security swaps are only suitable if you’re borrowing the same amount (or less) as your current loan. So, if you’re upgrading to a pricier home and need a bigger loan, you’ll need to go through the process of applying for a new one.
- Strict eligibility criteria
For a security swap to work, the names on the loan need to stay the same, and the new property has to meet your lender’s valuation requirements. If you’re behind on repayments or want to adjust your loan features, a security swap might not be the best option.
Can a mortgage broker help?
Security swapping can feel like a lot to wrap your head around—especially when timing is critical.
That’s where a mortgage broker can make all the difference. They’ll help guide you through the process and ensure everything goes off without a hitch.
Here’s how a mortgage broker can assist:
- Expert advice
- Managing settlements
- Exploring other options
Whether you decide to go ahead with a security swap or choose another route, having a mortgage broker by your side can help make the whole process much simpler and stress-free.
*This blog is intended for general informational purposes only. For personalised advice tailored to your unique financial situation, please contact NMC Finance.
