If you need to borrow money to purchase a home, you most likely need to borrow a large amount. Most home loans will require some form of collateral as security. It is worth understanding the types of security you can use. In addition, you should consider whether you can use your property as security for a loan.

What is Property Security?

A security is what protects a lender from losing their money if you become unable able to repay your debt. If you are unable to make your repayments, your lender can sell the security (the property) to recover their money. In some cases, the lender may even make a profit on the sale. If there was no security for the loan, your lender (usually, the bank) would have no guarantee of having the loan repaid. No security means you could default on repayments, disappear, and never repay the debt.

Security is any form of asset or money that protects a loan. Property security, on the other hand, is security in the form of property. This property could be a property you already own or property you are taking the loan out to buy.

For example, you may have a child wishing to take out a home loan, and you can use your family home as security for that loan.

However, we recommend you take caution when securing a loan with your property, particularly if the loan is for a third party (e.g. a child or a friend).

How Does Property Security Work?

A property security guarantees a lender that the value of the property secures the loan. If you service your loan repayments, the property remains yours. If you default on the loan, your lender has the right to sell the property to repay the outstanding debt, including any interest. Typically, your lender will keep the deed of the property until you repay the loan in full.

Types of Property Used as Security

Sometimes the type of property that a lender will accept as security will depend on how easy it is to sell the property. There are several property types that lenders are less fond of than others, including:

  • heritage-listed properties
  • studios;
  • serviced apartments; and
  • very valuable luxury properties.

What Happens if You Default?

If you default on repayments, the Australian Securities and Investment Commission (ASIC) enforces the following process:

  1. your lender is entitled to sell the security to meet the outstanding debt if, after giving notice of the default, you are still unable to pay the repayments.
  2. your lender should send you a Letter of Demand or a Notice of Requirement upon defaulting.
  3. if you fail to meet the repayments set out in the letter of demand, your lender will send you a default notice. This notice details how to rectify the situation and gives you 30 days to take steps to do so.
  4. after your lender sends all the necessary notices, you can request a hardship service. If you do not make a request, your lender can obtain a court order allowing them to enter into and sell the property to recover the outstanding debt.
  5. you can attempt to defend this action by filing a Notice of Appearance no more than ten days after receiving the default notice, followed by a Notice of Defence no more than 30 days after the Notice of Appearance.
  6. if your defence fails, the court will permit your lender to take possession of the property and proceed to sale.

Key Takeaways

If you are looking to obtain a home loan, you will likely need some type of security for that loan. This security can be your property or some other asset or money. If you default on the loan, your lender can take steps to sell that security to repay the loan. If you have questions about your loan agreement, get in touch with LegalVision’s banking and finance lawyers on 1300 544 755 or fill out the form on this page.

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