Property security: how it works with a home loan

Recently updated on January 10th, 2023 at 04:44 pm

There’s no doubt that Australian borrowers are spoilt for choice with home loan providers from banks, private lenders, specialist lenders, non-banks and fintechs. Though with all the loan options available, how will you know which one is right for you?

Choosing the right financing for your home loan is not an easy task. One of the core considerations is the property security required. Here’s an overview of some areas to consider.

What is property security? 

Property security (or mortgage security) is how lenders guarantee an asset against your home, and what they use as protection in the unfortunate event that you can’t repay your debt. Or in other words, if the borrower stops paying the home loan debt, the lender has the right to take possession of the secured property. This means that the lender will sell to recover the loan borrowed, as well as the overall costs. The property security may be the property that the loan is being used to buy or an alternative property.

Types of properties that usually can’t be used for security

A property of high value is usually preferred by lenders. Though it’s important to keep in mind that some property types aren’t acceptable and that this varies substantially depending on the lending criteria and property location, including :

1. Studio apartments

You typically can’t use studio apartments between 25 and 40 square metres as security, mainly because of their size. This type of property is often considered a risky investment for lenders. Also, compared to a one-bedroom apartment, which has a separate wall for a bedroom and living spaces, studio apartments lack internal walls. Again, while each lender varies, generally speaking, you’ll have more chances of using a studio apartment as property security if:

• The internal area of the studio apartment is over 40 square metres.
• The studio flat has a total area of 50 square metres plus, including internal space, laundry area, balconies and car spaces.
• The apartment has a value ratio of 80%.

2. Inner city flats

Similarly, high-building density areas and buildings that have more than 30 stories are often deemed risky for lenders. In addition, getting approval for an apartment that’s located in buildings where units are not yet sold or occupied can also be challenging as lenders are often wary that the building location and/or apartments have limited marketability.

3. Serviced apartments

A serviced apartment is often leased to a business operator. This means it is usually linked to a management agreement that the lender does not have control over (and lenders like to be in control and not exposed).

4. Heritage-listed

Banks and lending companies tend to evade such properties because of their broad restrictions and ties with the government.

5. High-value luxury properties

The challenge with high-value luxury properties is that they can substantially fluctuate in value, depending on market conditions. Again, many lenders deem this instability risky.

Mortgage defaults: what happens next

In the event where you are unable to pay your loan, the Australian Securities and Investment Commission (ASIC) advises the following guidelines:

•     Your lender has the right to sell the security to meet the outstanding debt and to cover other costs if payment falls into default and, at the same time, if the notice of the default is not corrected.
•     The lender will issue a letter of demand or Notice of Requirement if payment falls into default. If still, the borrower fails to meet the payment schedule set in the demand letter, the lender will submit a default notice, requesting to rectify the situation within 30 days.
•     To correct this, you can request a hardship service. Failure to do so will allow the lender to acquire a court order to sell the property.

Key takeaway

If you have a property, you can tap into its equity to gain access to funding. However, not all properties can be used as security. Studio apartments, inner-city flats, serviced apartments, heritage-listed and high-value luxury properties are some properties that may be challenging to use as security.

Mango Credit

Yanis Derums is the Founder and Director of Mango Credit– a leading private lender specialising in bridging loans for personal use and business short term loans for commercial and/ or investment purposes. Yanis has extensive experience with financial analysis, credit assessment, product structuring, and general business management