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.
Security: Security is an asset that is used to protect the loan. The security will have to be something that, if sold, can cover the cost of the loan and any money that is spent selling the item. The security can be a number of things, but will generally be in the form of property or liquid/accessible cash.
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.
What is a guarantor and how do they provide security?
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.
What types of property cannot be used as security?
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.
There are few lenders willing to risk financing a studio apartment, since they are considered to be in low-demand due to their size. In fact, most lenders won't even look at an application for a home loan on a property that is smaller than 40 square metres. Unfortunately, most studio flats are between 25 and 40 square metres, making things difficult. However, there are one or two lenders willing to consider properties with a surface area smaller than 40 square metres as loan security, but you might want to consider contacting a professional mortgage broker for help as such applications can be difficult to get through.
Serviced flats are usually under a management agreement, whereby a number of investors benefit from the profits that a complex of such apartments generates from short-term tenants. Therefore, due to this management agreement, most lenders are unwilling to risk accepting such units as loan security.
If you are considering an inner city flat you may not be able to get more than 60% of the value of the property, especially on a low doc home loan. An inner city flat is considered to be a high density unit, located in buildings that have more stories or that have more than 30 flats.
You will find it even more difficult to use an inner city flat as loan security if it is located in a building where there are still units that haven't been sold. This is because the unsold units give the lender the impression that demand is low for such property types.
Lenders tend to 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. After all, not everyone wants to invest a property that they can't make changes to as they wish.
However, this doesn't mean all lenders are unwilling to approve a home loan for a heritage listed property, but it does mean you will have your work cut out for you finding a lender to approve your application.
When it comes to luxury properties, you will find that you can usually only borrow 60% of the value of a property that exceeds $3,000,000. Additionally, very few lenders are willing to accept such properties as loan security because their value can fluctuate significantly, depending on market conditions.
What happens if you don't make your repayments?
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.
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.
Can you change your property security?
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.
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.
If you own your house outright, you may be able to borrow up to 80% of the property's value. However, the amount you can borrow will vary depending on the lender's policies and your financial situation. Your current house will be used as collateral against the loan, which means it could be seized by the lender in the event you fail to repay the loan.
Marc Terrano is a lead publisher and growth marketer at Finder. He has previously worked at Finder as a publisher for frequent flyer points and home loans, and as a writer, podcast host and content marketer. Marc has a Bachelor of Communications (Journalism) from the University of Technology Sydney. He’s passionate about creating honest and simple reviews and comparisons to help everyone get value for money. See full bio
As an authority on all things personal finance, Sarah Megginson is passionate about helping you save money and make money. She is an editor and money expert with 20 years’ experience and an extensive background in property and finance journalism. Sarah holds ASIC RG146-compliant Tier 1 Generic Knowledge certification, and she's a regular media commentator, appearing weekly on TV (Sunrise, Channel 7 news, Nine news), radio (KIIS FM, Triple M, 3AW, 2GB, 6PR) and in digital and print media. See full bio
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Sarah has written 190 Finder guides across topics including:
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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
Finder
HaroldMay 8, 2017Finder
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
KylieFebruary 14, 2017
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
Finder
DeeFebruary 15, 2017Finder
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
KylieFebruary 15, 2017
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 ?
Finder
DeeFebruary 17, 2017Finder
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
JillOctober 8, 2016
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
Finder
DeeOctober 10, 2016Finder
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
GeorgeMay 31, 2016
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.
Finder
MarcJune 2, 2016Finder
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.
tommyFebruary 21, 2016
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
Finder
MarcFebruary 22, 2016Finder
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
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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