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, $600,000) is "secured" against a property asset that is worth more than the loan ($800,000).
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.
"The key to any mortgage is the collateral you are offering to the lender; it is one of the 5 C's of credit that a bank will review prior to approving a loan. There are a number of factors banks look at – most importantly, if the loan goes bad and they need to foreclose, can we clear the loan and can we sell quickly? Lending for a bank is all about the risks involved, they look to limit these as much as possible. A lender that assumes more risk on a borrower's character or capacity to repay will often take less risk on security. If they assume security risk, they will often have harsher policies in other areas. When assessing a security they will look at market conditions, improvements, liveability, likely sale times, location and other factors that make a potential mortgage risky. Borrowers should think as if the bank is investing in the property with them, ensuring that both parties are happy to assume the risk."
A default notice, which is also called a section 88 Notice, is a notice that a bank must give you before they take enforcement action against you, after you have defaulted on your home loan. The bank must give you a default notice before it calls for the repayment of your entire home loan as well.
The bank must give you at least 30 days to fix the default. It's not a lot of time, but gives you enough breathing to explore options to catch back up on your repayments. This could look like:
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 you're falling behind on your repayments, the best thing to do is to contact your bank as soon as possible. Once you have fallen too far behind, you are officially in default and the support options become less flexible. If you make contact early on, you may be able to access hardship policies like payment relief (a full or partial pause on your home loan, credit card or personal loan repayments; moving to interest only payments; delayed payments, where you make an arrangement to repay any missed payments over a set period when your hardship support ends; or loan contract variation.
The most important things to know about home loan defaults
This is possible with loan portability, which is a feature offered on most variable rate home loans. It allows you to keep your loan when you buy a new property and simply 'port' the loan over to the new security, rather than refinancing your home loan.
A $40,000 mistake: The property security mis-step that 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.
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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.