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Property security: how it works with a home loan

Your property provides your lender with collateral for your 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, $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.
  • 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 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.

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.

The most important things to know about home loan defaults

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.

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.

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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1 - 20 of 73
Name Interest Rate p.a. Comparison Rate p.a. Fees Monthly Payment
Principal & Interest40% min. depositOwner-occupier
Interest Rate
6.09%
Comparison Rate
6.11%
Fees
Application: $0
Ongoing: $0 p.a.
Monthly Payment
$909
Go to siteMore Info
Principal & Interest20% min. depositOwner-occupierRefinance
Interest Rate
5.99%
Comparison Rate
5.90%
Fees
Application: $0
Ongoing: $0 p.a.
Monthly Payment
$900
Go to siteMore Info
Principal & Interest5% min. depositOwner-occupierNew Purchase - Metro only
Interest Rate
6.30%
Comparison Rate
6.58%
Fees
Application: $0
Ongoing: $0 p.a.
Monthly Payment
$930
Go to siteMore Info
Principal & Interest 2Y Fixed20% min. depositOwner-occupier
Interest Rate
5.99%
Comparison Rate
6.34%
Fees
Application: $449
Ongoing: $0 p.a.
Monthly Payment
$900
Go to siteMore Info
$2000 cashback
Eligible refinancers can get $2,000 cashback when switching their loan of at least $500k to IMB. Other terms and conditions apply.
Principal & Interest 3Y Fixed10% min. depositOwner-occupierOffset account
Interest Rate
5.80%
Comparison Rate
5.91%
Fees
Application: $0
Ongoing: $0 p.a.
Monthly Payment
$882
Go to siteMore Info
Principal & Interest 3Y Fixed30% min. depositOwner-occupier
Interest Rate
5.99%
Comparison Rate
6.13%
Fees
Application: $0
Ongoing: $0 p.a.
Monthly Payment
$900
Go to siteMore Info
Principal & Interest10% min. depositOwner-occupierOffset account
Interest Rate
6.01%
Comparison Rate
6.14%
Fees
Application: $0
Ongoing: $10 p.a.
Monthly Payment
$902
Go to siteMore Info
Principal & Interest20% min. depositOwner-occupier$150,000 to $500,000
Interest Rate
6.14%
Comparison Rate
6.17%
Fees
Application: $0
Ongoing: $0 p.a.
Monthly Payment
$914
Go to siteMore Info
Principal & Interest10% min. depositOwner-occupier$750,000 and above
Interest Rate
6.29%
Comparison Rate
6.32%
Fees
Application: $0
Ongoing: $0 p.a.
Monthly Payment
$929
Go to siteMore Info
Principal & Interest10% min. depositOwner-occupierOffset account
Interest Rate
5.99%
Comparison Rate
6.51%
Fees
Application: $0
Ongoing: $0 p.a.
Monthly Payment
$900
Go to siteMore Info
Principal & Interest20% min. depositOwner-occupierOffset account
Interest Rate
6.04%
Comparison Rate
6.08%
Fees
Application: $595
Ongoing: $0 p.a.
Monthly Payment
$905
Go to siteMore Info
$3,000 refinance cashback offer
Eligible refinancers who apply online and borrow $250K+ (LVR 80% or lower) can get a $3,000 cashback. Terms and conditions apply.
Principal & Interest50% min. depositOwner-occupier
Interest Rate
6.24%
Comparison Rate
6.24%
Fees
Application: $0
Ongoing: $0 p.a.
Monthly Payment
$924
Go to siteMore Info
Principal & Interest5% min. depositOwner-occupierOffset accountSpecial Offer
Interest Rate
5.90%
Comparison Rate
5.93%
Fees
Application: $0
Ongoing: $0 p.a.
Monthly Payment
$891
Go to siteMore Info
Principal & Interest50% min. depositOwner-occupierOffset account
Interest Rate
5.99%
Comparison Rate
6.04%
Fees
Application: $600
Ongoing: $395 p.a.
Monthly Payment
$900
Go to siteMore Info
Principal & Interest30% min. depositOwner-occupierOffset account
Interest Rate
5.98%
Comparison Rate
5.98%
Fees
Application: $0
Ongoing: $0 p.a.
Monthly Payment
$899
Go to siteMore Info
Principal & Interest20% min. depositInvestmentRefinance
Interest Rate
6.29%
Comparison Rate
6.20%
Fees
Application: $0
Ongoing: $0 p.a.
Monthly Payment
$929
Go to siteMore Info
Principal & Interest40% min. depositOwner-occupierOffset account
Interest Rate
6.14%
Comparison Rate
6.38%
Fees
Application: $0
Ongoing: $250 p.a.
Monthly Payment
$914
Go to siteMore Info
Principal & Interest40% min. depositOwner-occupierOffset account
Interest Rate
6.15%
Comparison Rate
6.40%
Fees
Application: $0
Ongoing: $248 p.a.
Monthly Payment
$915
Go to siteMore Info
Principal & Interest10% min. depositInvestment$750,000 and above
Interest Rate
6.49%
Comparison Rate
6.52%
Fees
Application: $0
Ongoing: $0 p.a.
Monthly Payment
$948
Go to siteMore Info
Principal & Interest20% min. depositOwner-occupier
Interest Rate
6.19%
Comparison Rate
6.21%
Fees
Application: $0
Ongoing: $0 p.a.
Monthly Payment
$919
Go to siteMore Info
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28 Responses

    Default Gravatar
    ElenaMay 16, 2023

    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

      AvatarFinder
      RichardMay 18, 2023Finder

      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.

    Default Gravatar
    DominicOctober 31, 2018

    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?

      AvatarFinder
      JhezelynNovember 9, 2018Finder

      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:

      • A guarantor needs equity in their property and a stable income to satisfy lenders.
      • Your guarantor should have a good personal credit rating.
      • Lenders generally want a guarantor to be an Australian citizen or permanent resident.
      • A guarantor must be over 18 and typically under 65.

      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

    Default Gravatar
    DavidOctober 5, 2017

    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.

      Default Gravatar
      DanielleOctober 5, 2017

      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

    Default Gravatar
    SueJuly 15, 2017

    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?

      Default Gravatar
      LiezlJuly 21, 2017

      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

    Default Gravatar
    ChrisMay 25, 2017

    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

      AvatarFinder
      DeeMay 29, 2017Finder

      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

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