Home Security: Investing In Property Lending
Why do we put such a high value on home ownership? One major reason is security.
5 October 2021
Security of tenure – your landlord can’t kick you out. Security of outgoings – you’re not paying an ever-increasing rent.
And there’s another kind of useful security. Your home can be security against additional lending and can provide you with emergency funds or a way to pay for renovations and other investments.
Security means more options and more confidence.
Unsecured versus secured investments
Loans comes in two types: secured and unsecured. Unsecured loans aren’t tied to any physical object. The loan is essentially just a promise between the borrower and the lender.
Borrowers pay higher interest rates for unsecured loans, and lenders can earn returns from unsecured lending through some peer-to-peer platforms (P2P).
Secured loans have collateral behind them; usually the asset that the loan has been used for. For instance, a home loan is secured against the home. If the borrower defaults, the lender can take control of the asset.
As a result, secured loans have much lower default rates than unsecured loans. Individual investors can also put their money into secured loans using a peer-to-peer platform – Zagga lends almost exclusively on residential and commercial property.
The confidence of a first registered mortgage
P2P lending allows you to lend money to other Kiwis – and you can invest on a sliding scale.
At the lowest entry point, investing in unsecured loans can start from $50. For secured loans in property, investing with Zagga, for example, starts at $1000.
Loan sizes range from $25,000 to $2 million and each loan is typically filled by 10 to 15 individual investors. However, an investor can invest any amount, from $1000 up to the whole amount of the loan.
“Secured lending is very different from unsecured lending – and the underlying loans are very different, too,” explains Marcus Morrison, director of Zagga.
“Because the money is secured by the property, we have systems to handle your investment in the event of a default. We’re a genuine second-tier lender. We manage risks comprehensively up front, then manage them day-to-day, keeping our eyes tightly on every loan.”
Each loan is a registered mortgage over a property, typically first-ranking. That means it has priority and must be repaid first, before any other loans.
It’s the type of home loan that the bank would typically have over a property. If the borrower has a bank mortgage on their home, Zagga refinances the loan and takes on the first registered mortgage position. Each lender is recorded as a beneficiary for their share of the property.
With that level of security, if the lender defaults, Zagga can trigger a process for recovery, potentially all the way through to a mortgagee sale.
“Investors know they hold a strong position if anything goes wrong,” Morrison says.
“They can rely on having a degree of control that they wouldn’t have with an unsecured loan. They also appreciate having a property backing up the loan.
“It’s a tangible piece of real estate – a house, a building or a section – which will always have a value. And that value is less eroded by inflation than other types of assets. In fact, growth often outpaces inflation.”
An alternative investment in a traditional asset
P2P investment is a way to diversify your investment portfolio, whether secured or unsecured. It provides a relatively high rate of return and a monthly income.
Secured P2P investing into property gives you an alternative way to invest in the most traditional and well-understood of asset classes.
“We have quite a few retired investors who say the money they earn each month from their Zagga investments makes big difference to their lives,” says Morrison.
“They don’t want to put their capital at undue risk, and this is a way to use a portion of your money to get a regular income and a good return in a relatively safe way.”
To hear more about secured investing through Zagga, visit the website here.
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