How does your property work as security for a home loan?
Your property provides your lender with collateral for your home loan
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Property security is a way for people to secure a loan. It's what the lender uses as protection in the event you can't repay the debt.
If you can't repay your debt or fall into severe financial difficulties, they can take possession of the asset you secured the loan with and sell it to recover their costs.
- Security: Security is an item or sum of money that is used to protect the loan. The security will have to be something that, if sold, will be able to cover the cost of the loan and any money that they spend selling the item. The security can be a number of things, but will generally be in the form of property or money.
- Property security: Property security is simply security in the form of property. The property security may be the property which the loan is used to buy, or it may be another property - it's not unheard of for a parent to use the family home to secure against a child's loan - but obviously, any agreement with a third party security must be consensual and agreed upon in writing.
The value of the security is assessed by a professional valuer. This is called a bank valuation. A bank valuation will determine the approximate price of the property and will be used to work out the loan size and subsequently, the loan to value ratio. 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.
What happens if the lender goes bankrupt?
If the lender goes bankrupt you'll not 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.
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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