Property security (or mortgage security) is the way that banks guarantee an asset against your home loan. It gives the lender confidence to get you a loan, because the money they lend you (say, $525,000) is "secured" against a property asset that is worth more than the loan ($600,000).
This is what the lender uses as protection in the event you can't repay the home loan debt. If the worst happens and you stop paying your home loan payments, the lender knows they can take possession of the asset you secured the loan with, and sell it to recover their costs.
The value of the security is assessed by a professional valuer. When the lender requests a valuation, known as a bank valuation, this document determines the approximate current value of the property and will be used to work out the loan size and subsequently, the loan to value ratio (LVR). This also gives the lender an indicative price on how much they can get for the asset if they have to sell it.
Related: Calculate your own LVR
Guarantors are generally parents or close family members who agree to assume responsibility for a home loan should the borrower be unable to repay it. Borrowers use guarantors to enable them to buy a home with little or no deposit. A guarantor often uses their own home as security for the borrower's home loan.
The easier a property is to sell and the higher the demand for that particular type of property, the better the chances of a lender accepting it as loan security. Below you will find a few property types that lenders tend to shy away from when it comes to low doc loans.
According to the Australian Securities and Investment Commission (ASIC), this is what happens when a mortgage default is enforced:
A lender can sell the primary security on a loan to cover their costs if a borrower's payments fall into default and if the payment default is not corrected after the lender gives notice.
Lenders will be required to submit a letter of demand or requirement notice if payments fall into default, although it is stated that this is not mandatory. If the borrower fails to make a payment as set out in the letter of demand, the borrower must then send a default notice. This notice explains how to rectify the situation and gives the borrower 30 days to do so.
Once the lender has served the appropriate notices and provided that the borrower has not requested a hardship service, the lender has the power to obtain a court order allowing them to enter the property. From here it can be sold to recoup their costs. A borrower has the option of defending against this action. They must file a Notice of Appearance within 10 days and a Notice of Defence within 30 days after that. If this does not happen, the court will order that the lender has the power to take possession of the property, but not the goods inside.
The property can be sold at auction or by private sale.
The most important things to know about home loan defaults
If the lender goes bankrupt you won't be liable to pay any money. However, if the lender goes bankrupt your loan and the security property may be switched to another lender. This will rarely negatively impact consumers in terms of the interest rates they pay on their loans.
Loan portability is a feature offered on the majority of variable rate home loans, which allows you to keep your loan when you buy a new property. Rather than refinancing your home loan, you switch the property you're using as security to take the current property off, and add the new property to the loan.
One important thing to keep in mind when it comes to security is that the security you have against your loan, doesn't always reflect the intention of the loan.
You might have a $300,000 loan secured against an investment property. But that loan may have been used to fund something entirely unrelated to the property - the money might have been used to fund a major renovation, as a deposit when buying your own home, or to fund a business.
The way you spend the money is of more interest to the Australian Tax Office when it comes to allowing tax deductions, than the actual security attached to the loan.
A $40,000 mistake: Why the wrong long structure could cost you dearly
When you've obtained your loan, ensure that your repayments are made on time. Remember that if you experience financial difficulties and cannot meet your loan obligations, contact your lender first to agree on a solution.
Information if you are struggling to pay your loan
Image: Shutterstock
Read our detailed explainer on the concept of home equity and how property owners can make use of it.
If you're buying a home from your parents below market value, there are a few details you need to know to make sure you're getting a good deal.
A guide to subject to finance clauses in housing contracts.
Discharged bankrupts start off their financial state fresh, but some may still find it difficult to get a mortgage. Discharged bankrupts may still get a home loan, but with stricter conditions and higher loan rates.
Here's everything you need to know about fees when exiting a home loan.
We explain the comparison rate meaning, how they work, and how you can use them to compare home loans.
Guarantor home loan options can help you buy a home, with a family member acting as a guarantor on your home loan. Learn how it works and if you qualify.
A line of credit loan gives you access to the equity in your property for whatever you may need.
Split home loans give you the benefits of both variable and fixed rates. Compare them today.
Find the cheapest home loan rates and learn how to decide which one best fits your needs and will save you the most money.
Hi,
My husband and I would like to purchase a property. We don’t have a deposit but would like to use my property as collateral, is this accepted or do we still require a deposit. Bearing in mind the property I will be using is in joint names with my sister in law. Do i need to ask for her permission also?
Thanks
Hi Gina,
Thank you for your inquiry.
Please note that most lenders would require a 20% deposit if you’re taking a regular home loan. However, there may be options in the market that you can compare, please refer to the pages below:
1. Cheapest Home Loans
2. Low Deposit Home Loans – Although you may have to get a guarantor for this type of loan
3. First Home Owners Grant – If it’s your first time to buy a home, then you may also check if you’re qualified for a grant in your local state.
Alternatively, you can reach out to a mortgage broker who will take all your circumstances into account and offer you a range of lending options.
I hope this information has helped.
Cheers,
Harold
Hi,
My husband and I are looking at getting his parents to go guarantors for us, the house they have might be Heritage listed. Will this make it ineligible to be used ?
Thanks
Hi Kylie,
Thanks for your question.
Lenders generally shy away from properties that are listed on a state or federal heritage protection list because these properties come with a wide range of restrictions and there aren’t as many people interested in purchasing such a property.
However, this doesn’t mean all lenders are unwilling to approve a home loan if your security is a heritage property. You may have to directly get in touch with the lenders you are interested in to inquire.
If you are interested, you can first compare your home loan options. Once you have selected a lender, you can directly get in touch with them to inquire if they are willing to accept your security.
Alternatively, you may also get in touch with a mortgage broker who is able to assist you in finding a suitable home loan option.
Cheers,
Anndy
Thanks for the reply.
The house we will be using is the heritage listed property not the one we want to buy, so why would using a heritage listed property as equity be a problem? They are not looking at selling their property just use it to help us buy our own house ?
If that makes sense ?
Hi Kylie,
Thanks for getting back.
You mentioned that you are applying a home loan with your husband’s parents as guarantors and they have a home which might be heritage listed.
In a home loan with a guarantor, the guarantor’s own home is often used as a security, so this would be the property of your husband’s parents. If you cannot repay your home loan, the bank can sell the property to recover their costs.
In our page above, we have listed Heritage Homes as among the properties which cannot be used as security. Other lenders may consider this but you’ll have to directly get in touch with them to inquire. Alternatively, you can get in touch with a mortgage broker to assist you in finding a suitable home loan option.
Cheers,
Anndy
I have been told by a Loans Broker that I can release the property being used as security, on a new property, after 20% of new mortgage has been repaid. Is this correct? Thank you
HI Jill,
Thanks for your question.
Please note that we are a financial comparison and information website and we do not provide expert advice on mortgages.
A property used as a security for a home loan is generally released once the standard LVR requirements of the loan product have been met due to loan repayments. So if a property is used as a guarantee for say 20% of the loan and the equivalent amount has already been repaid, then the property may be released. Your mortgage broker or lender should be able to organise this for you.
Cheers,
Anndy
I own a property which is used as security for a mortgage on a house my son has purchased about 2 years ago. I want to sell my property and buy elsewhere. Can I sell and transfer the security to the other property I intend to buy. My son’s house valuation may not qualify him for re-finance.
Hi George,
thanks for the question.
I would recommend contacting your son’s lender to find out what their policy will be regarding this. They’ll be able to advise whether or not this will be allowed.
Sorry I couldn’t be of more help to you,
Marc.
i want to borrow 50k i will use my house thats worth 100k i own this house outright i dont owe nothing on it but i have bad credit what would be the chance of getting this loan with the loan i want to pay off all my bills and finish up on a few projects on and around the house
Hi Tommy,
Thanks for the question.
Your chance for a loan such as this will depend on the lender you approach, in addition to the other usual factors: your debts, credit file, assets, liabilities and income. You may want to compare your bad credit loan options and you can also consult with a mortgage broker. A broker can help you understand your financial position and they can leverage their panel of networks to find a lender that’s more inclined to review your application.
Before applying, please ensure that you meet all the eligibility criteria and read through the details of the needed requirements as well as the relevant Product Disclosure Statements/Terms and Conditions when comparing your options before making a decision on whether it is right for you.
I hope this helps,
Marc