If you need to borrow money to purchase a home, you will most probably be looking to borrow a large amount. Since home loans normally require some form of collateral as security, it is worth understanding the types of security you may use and whether you could consider using your property as security for a loan.

What is property security?

Using your property as security for a loan is known as ‘property security’. This is one method of securing a loan from a lender, such as a bank. It is what protects a lender from losing its money in the event that you are no longer capable of servicing your debt repayments. If there were no security for the loan, the banks would feel insecure in giving them. No security means you could default on repayments, disappear, and never repay the debt.

By forcing the borrower to provide security for the loan, the lender is entitled to sell the asset (probably another property you own) and recover any outstanding debts. In some cases, the lender may even make a profit on the sale.

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 might be property you already own or it might be 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 may wish to use your family home as security for that loan.

If you wish to secure a loan with your property, particularly if it is for a third party, such as a child or a friend, we recommend you speak with a commercial lawyer before you enter into any agreement. 

How does property security work?

A property security guarantees a lender that its loan is secured by the value of the property. If you are able to service your loan repayments, the property security will not be sold. Upon default, however (or some time after default, depending on the terms of your particular loan agreement), the lender will have the right to sell the property to service the outstanding debt, including any interest.

Normally, the lender will hold onto the deed of the property until the loan is repaid 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, i.e. is there a high demand for this 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?

When a mortgagee has defaulted on repayments, the Australian Securities and Investment Commission enforces the following process:

  1. The 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. Lenders should send you a letter of demand or a notice of requirement upon defaulting. Upon failing to meet the repayments set out in the letter of demand, the lender will need to send you a default notice. This notice details how to rectify the situation and gives you 30 days to take steps to do so. After the lender sends you all the necessary notices and you do not request a hardship service, the lender will be able to get a court order that lets them enter into, and sell, the property to recover the outstanding debt. You can try and defend this action by filing a Notice of Appearance no more than 10 days, followed by a Notice of Defence no more than 30 days after the Notice of Appearance. If you fail to do so, the court will permit the lender to take possession of the property, and proceed to sale by auction or to private seller.

Conclusion

If you are using a property as security for a loan, you may want to speak to a lawyer about reviewing the loan agreement. Our lawyers have extensive experiencing in drafting and reviewing loan agreements and will negotiate on your behalf. To speak with a commercial lawyer, contact LegalVision on 1300 544 755.

Lachlan McKnight

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