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
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Hi
Could you please advise if I want to put my home up as security to purchase a property for my daughter, could you confirm whether I have to seek finance through the same lender.
Hi Leanne,
Thank you for your question.
It would depend on whether you are wanting to use your property as security to co-guarantor for your daughter to take out her own loan. In which case, you would not have to seek finance through the same lender as it would be your daughter who is seeking finance.
If you are simply using the equity in your home to obtain more finance in order to purchase a property for your daughter where she is not the person seeking the loan, you will need to look at your refinancing options whether it be with the same lender or a new lender.
If you still have funds owning on your property this will limit the amount a lender will offer you as a loan but if you own your property outright you have all the equity available to use.
It would be recommended that you seek personal legal and financial advice and possibly speak to a mortgage broker before going forward with any decision that puts your property up as security as there are implications relating to your property that you would need to consider before making this decision.
Regards,
Jodie
im currently unemployed but i have monthly income of 6400 monthly and i want to borrow and amount of 180 000 and make my house as a security
Hi Siphiwe,
Thanks for the question.
You might want to compare different home loans using our comparison table. When you are ready, press the ‘Go to site’ button to apply or to speak to the lender. You can also contact a mortgage broker to find out what loans might be available to you.
I hope this helps,
Marc
Hi there and thanks for taking time to assist in my query.
I currently own 4 investment properties with a friend and would like to use the equity available as security for a home for me and my Family.
Of the 4 properties there is about 300k equity available but if i drew upon that as security would it be detrimental for any development opportunities myself and my partner would like to initiate against one of the 4 properties?
I hope that makes sense! my fear is that i would use 1 or all of the investment properties as security but then remove the possibility to use equity for a development opportunity on one of the 4.
Thanks,
Rob
Hi Rob,
thanks for the comment.
Unfortunately I’m not able to give personal advice of this nature. You may wish to use the services of a financial advisor or speak to your lender to learn more.
I hope this helps,
Marc.