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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My loan was calculated as 35%of the house value at the time, I rebuilt the house , it now worth 5 times as much as the old one. Can I withdraw my house from the bank as security?
Thanks
Hi Elena,
As long as you have a mortgage that isn’t fully paid off the bank will require a property as security, even if the value is much higher now. I suggest contacting the lender if you want to vary the loan arrangement.
Can a guarantor use an overseas property as security for the loan? For example, the guarantor has property and lives in NZ and I am to purchase a house in Australia. Is the guarantor able to use the property in NZ as security for purchasing a house in Australia?
Hello Dominic,
Thank you for your comment.
Please be advised that the guarantor eligibility criteria may vary per lender, however, you may refer to the general requirements below:
You may refer to our list of guarantor home loans.
Please note that a guarantor cannot use the overseas property as security to assist. The property security would have to be in Australia.
Should you wish to have real-time answers to your questions, try our chatbox on the lower right corner of our page.
Regards,
Jhezelyn
I have HOUSE A as security for HOUSE B (HOUSE A is totally debt free and I live in it and is in MY name, and HOUSE B is in both my son’s name AND mine as joint owners. My son makes ALL the repayments on HOUSE B). If I died then HOUSE A is to be sold and HOUSE B gets left to my son. Does ALL the money from the sale of HOUSE A have to pay off HOUSE B or can I pay some of it off to reduce his loan and leave the remaining funds to others in my estate? I hope you can follow this.
Hi David,
Thank you for contacting Finder.
There are three main factors that determine what will happen if you have a mortgage when you die: your will, your mortgage agreement, and your insurance policies. Check our guide to find out more.
I hope this helps.
Cheers,
Danielle
Can an unencumbered vacant block of rural land used for commercial purposes of farming be offered as security by the guarantor in a limited guarantor home loan?
Hi Sue,
Thanks for your question.
The type of real estate that can be used as security guarantee varies between lenders depending on the loan amount and the portion of the loan guaranteed by the guarantor. It’s a good idea to enquire from the lenders directly, better still approach a mortgage broker for advice tailored to your needs.
Cheers,
Liezl
hi
i have a house on crown land we rent the ground but the house is ours can i use the house to borrow for the land with out a deposit
Hi Chris,
Thanks for your question.
Lenders have different criteria when it comes to properties that can be accepted as a security for a home loan. The general rule is 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.
You may compare your home loan options on our website for further details. Once you have selected a particular lender, you may have to directly get in touch with them to discuss the eligibility of your property as a security.
Be sure to speak to a mortgage broker as well. A mortgage broker is a professional who compares and helps you apply for home loans on your behalf. A good mortgage broker will give you personalised service all the way through to settlement.
I hope this helps.
Cheers,
Anndy