Using your property as security

How does your property work as security for a home loan?

Learn the important information you need to know if you are considering using your existing property as security

When you borrow money to buy a home, the lender needs assurances that you'll pay it back and that they can recoup their costs. All regular home loans require security as collateral for the loan. Most use the property you intend to buy as security, though if you have a home loan guarantor such as your parents or a close family member, their property may be used as security. If you cannot repay your home loan, the bank can sell the property to recover their costs. Commonly, a home loan will involve the lender holding the deed of the property until the loan is repaid.

What is property security?

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.

By making borrowers put up a security against the loan, 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 (most likely your own property) 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.

How does property security work?

The property security is used as a safeguard for the lender. If you pay off your loan as asked the property security won't be used. However, if you fail to pay the loan as agreed, the property security may eventually be used to pay off the money the lender has given you.

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.

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 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.

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 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.

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.

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.

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.

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'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.

Using property as security is one of the most reliable ways to secure loans for large amounts of money. It's common to use the property you have bought as security. Just remember your home is at risk if you fall behind with repayments, and should you fall into real trouble you could lose your home altogether. This is why it's so important to budget correctly and to never borrow more than you can realistically afford to repay.

Remember, the security is there for the lenders, not for consumers. It's a necessary step to secure your home loan and work your way towards full home ownership. Use the calculator to calculate how much you could potentially borrow before making the commitment to a home loan.

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

Marc Terrano

A passionate publisher who loves to tell a story. Learning and teaching personal finance is his main lot at finder.com.au. Talk to him to find out more about home loans.

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24 Responses

  1. 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.

    • Staff
      DanielleOctober 5, 2017Staff

      Hi David,

      Thank you for contacting finder. We are a comparison website and general information service, we’re more than happy to offer general advice.

      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. You may refer to this page to find out more.

      I hope this helps.

      Cheers,
      Danielle

  2. 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?

    • Staff
      LiezlJuly 21, 2017Staff

      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

  3. 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

    • Staff
      AnndyMay 29, 2017Staff

      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 this page. 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.

      Cheers,
      Anndy

  4. Default Gravatar
    GinaApril 28, 2017

    Hi,
    My husband and I would like to purchase a property. We don’t have a deposit but would like to use my property as collateral, is this accepted or do we still require a deposit. Bearing in mind the property I will be using is in joint names with my sister in law. Do i need to ask for her permission also?

    Thanks

    • Staff
      HaroldMay 8, 2017Staff

      Hi Gina,

      Thank you for your inquiry.

      Please note that most lenders would require 20% deposit if you’re taking a regular home loan. However, there may be options in the market that you can compare, please refer to the pages below:

      1. Cheapest Home Loans
      2. Low Deposit Home Loans – Although you may have to get a guarantor for this type of loan
      3. First Home Owners Grant – If it’s your first time to buy a home, then you may also check if you’re qualified for a grant in your local state.

      Alternatively, you can reach out to a mortgage broker who will take all your circumstances into account and offer you a range of lending options.

      I hope this information has helped.

      Cheers,
      Harold

  5. Default Gravatar
    KylieFebruary 14, 2017

    Hi,
    My husband and I are looking at getting his parents to go guarantors for us, the house they have might be Heritage listed. Will this make it ineligible to be used ?

    Thanks

    • Staff
      AnndyFebruary 15, 2017Staff

      Hi Kylie,

      Thanks for your question.

      Lenders generally 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. However, this doesn’t mean all lenders are unwilling to approve a home loan if your security is a heritage property. You may have to directly get in touch with the lenders you are interested in to inquire.

      If you are interested, you can first compare your home loan options here. Once you have selected a lender, you can directly get in touch with them to inquire if they are willing to accept your security.

      Alternatively, you may also get in touch with a mortgage broker who is able to assist you in finding a suitable home loan option.

      Cheers,
      Anndy

    • Default Gravatar
      KylieFebruary 15, 2017

      Thanks for the reply.
      The house we will be using is the heritage listed property not the one we want to buy, so why would using a heritage listed property as equity be a problem? They are not looking at selling their property just use it to help us buy our own house ?
      If that makes sense ?

    • Staff
      AnndyFebruary 17, 2017Staff

      Hi Kylie,

      Thanks for getting back.

      You mentioned that you are applying a home loan with your husband’s parents as guarantors and they have a home which might be heritage listed.

      In a home loan with a guarantor, the guarantor’s own home is often used as a security, so this would be the property of your husband’s parents. If you cannot repay your home loan, the bank can sell the property to recover their costs.

      In our page above, we have listed Heritage Homes as among the properties which cannot be used as security. Other lenders may consider this but you’ll have to directly get in touch with them to inquire. Alternatively, you can get in touch with a mortgage broker to assist you in finding a suitable home loan option.

      Cheers,
      Anndy

  6. Default Gravatar
    JillOctober 8, 2016

    I have been told by a Loans Broker that I can release the property being used as security, on a new property, after 20% of new mortgage has been repaid. Is this correct? Thank you

    • Staff
      AnndyOctober 10, 2016Staff

      HI Jill,

      Thanks for your question.

      Please note that we are a financial comparison and information website and we do not provide expert advice on mortgages.

      A property used as a security for a home loan is generally released once the standard LVR requirements of the loan product have been met due to loan repayments. So if a property is used as a guarantee for say 20% of the loan and the equivalent amount has already been repaid, then the property may be released. Your mortgage broker or lender should be able to organise this for you.

      Cheers,
      Anndy

  7. Default Gravatar
    GeorgeMay 31, 2016

    I own a property which is used as security for a mortgage on a house my son has purchased about 2 years ago. I want to sell my property and buy elsewhere. Can I sell and transfer the security to the other property I intend to buy. My son’s house valuation may not qualify him for re-finance.

    • Staff
      MarcJune 2, 2016Staff

      Hi George,
      thanks for the question.

      I would recommend contacting your son’s lender to find out what their policy will be regarding this. They’ll be able to advise whether or not this will be allowed.

      Sorry I couldn’t be of more help to you,
      Marc.

  8. Default Gravatar
    tommyFebruary 21, 2016

    i want to borrow 50k i will use my house thats worth 100k i own this house outright i dont owe nothing on it but i have bad credit what would be the chance of getting this loan with the loan i want to pay off all my bills and finish up on a few projects on and around the house

    • Staff
      MarcFebruary 22, 2016Staff

      Hi Tommy,
      thanks for the question.

      Your chance for a loan such as this will depend on the lender you approach, in addition to the other usual factors: your debts, credit file, assets, liabilities and income. You might wish to consult a mortgage broker or read more about bad credit home loans before applying.

      I hope this helps,
      Marc.

  9. Default Gravatar
    leanneSeptember 1, 2015

    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.

    • Staff
      JodieSeptember 1, 2015Staff

      Hi Leanne,

      Thank you for your question regarding property security and home loans.

      We at finder.com.au offer generalised advice and cannot advise you on your specific circumstances for this type of advice we would recommend seeking the advice of legal and financial advisors.

      It would depend on whether you are wanting to use your property as security in order to go 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 however 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

  10. Default Gravatar
    siphiweAugust 19, 2014

    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

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