Property security: how it works with a home loan

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.

What does using a property as security mean?

• Security: An asset that is used to protect the loan. The security is something that, if sold, can cover the cost of the loan and any money that is spent selling the item. It can be a number of things, but will generally be in the form of property or liquid/accessible cash.
• Property security: Property security is simply security in the form of property. The property security may be the property that the loan is used to buy, or it may be another property. For instance, a parent may offer the family home as security against a loan for their child's property purchase.

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

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.

• Studio Flat

  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 Apartment

  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.

• Inner City Flats

  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.

• Heritage Listed

  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.

• High Value Luxury Properties

  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.

Expert insight

"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."

Matt Turner

Managing broker, GSC Finance

What happens if you don't make your mortgage repayments?

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:

• Refinancing to restructure your debts and catch up on missed payments
• Selling other assets to repay your missed repayments
• Selling the property to pay out the entire loan

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

Can you change your property security?

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.

Information if you are struggling to pay your loan

Frequently Asked Questions

• How much can I borrow if I own my house outright?

  If you own your house outright, you may be able to borrow up to 80% of the property's value or even more, if you're prepared to pay lenders mortgage insurance. 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.

• If my loan security is an investment property, does that mean it's always tax deductible?

  The security you have against your loan, doesn't always reflect the intention of the loan. For instance, you might have a $300,000 loan secured against an investment property worth $500,000. But that loan may have been used to fund something entirely unrelated to the property – for instance, you borrowed it to purchase a new car and pay for a major renovation on your own home. This means that even though the loan is secured against an investment property, the purpose of the loan wasn't to fund the investment, so it's not tax deductible. In other words: 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.

• What happens if the lender goes bankrupt?

  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.

• What assets can be used as collateral to secure a home loan?

  The most common security is property – most banks will want to secure the loan against the property that is being purchased. However you may also be able to secure the loan against other properties (investments or holiday homes) or cars.

Written by

Marc Terrano

Publisher

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

Co-written by

Sarah Megginson

Personal finance expert + media spokesperson

With over 20 years of experience in property, finance and investment journalism, Sarah is a trusted expert whose insights regularly appear across television, radio, and print media, including Sunrise, ABC News, and Yahoo! Finance. She has previously served as managing editor for Your Investment Property and Australian Broker, and her expert advice has been shared over 2,500 times in 2023-2024 alone. Sarah holds a Bachelor’s degree in Communications and a Tier 1 Generic Knowledge certification, which complies with ASIC standards. See full bio

Sarah's expertise

Sarah has written 200 Finder guides across topics including:

• Home loans
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