When a bank lends you money, they are taking a risk that you will not or cannot pay them back. To negate this risk, lender’s often ask for security or collateral for the loan. This is a valuable asset you can offer to the lender, which they can legally take and sell if you default on your repayments. In this way, they can be sure that they will be able to recover their money.
Property security is therefore security in the form of property. This can be property that you already own, or the property that you are taking the loan out to buy. For example, a car financing agreement where you take a loan to purchase the car, but the lender can repossess and sell the car if you default on your repayments. if you finish paying off the loan the property is then yours to keep.
Types of Property
Not all property is accepted as equal by lenders; normally, the easier it is to sell the property the more likely it will be accepted. For example, a highly expensive luxury estate may not be accepted due to the limited market for it. It is unlikely a racing car would be accepted either due to the high risk of a crash and damage to the property.
Lenders will also not accept property which other parties already have an interest in e.g. a mortgaged house.
Process if you default
The Australian Securities and Investment Commission (ASIC) is responsible for enforcing the following process:
- You default on your repayments
- Your lender sends you a Letter of Demand
- If you fail to provide the repayments listed in the Letter of Demand, your lender will send you a default notice. You then have 30 days to rectify the situation.
- It is possible for you to demonstrate hardship and obtain a greater time period than 30 days. You should speak to a lawyer to learn about all your options.
- Your lender can obtain a court order allowing them to repossess your property and sell it.
Summary
Providing property as collateral in a loan can be an effective way to secure a loan and reduce interest rates. However, it comes with a high degree of risk, and you should always ensure you have carefully managed your financials and will be able to meet your repayments. It also goes without saying that you should be extremely careful when using property to secure a loan for a third party e.g. a child or a friend.