What is acceptable security for a home loan

If you've been shopping around for a home, you may have heard the term "security".

Basically, it refers to the idea that banks need something tangible before they just give money away. So they know you can back up the loan with an asset.

Now, what does this mean for home owners?

If you're buying a home for yourself or your family, the bank will require security for this loan. The property itself will be the "security" for the loan, provided the property is considered suitable security.

That means there's an asset behind all that money they're lending you. That's why banks always want to do a valuation on a property you buy. They want to know that it's worth at least as much as they're lending out to you! 

But can you use other types of security for a home loan?

Sure. In fact, a growing number of Victorians are using another form of security - especially as property prices continue to rise.

The bank of mum and dad

You've probably heard more about "guarantors" lately, and may have heard someone suggest that they go "guarantor" on a home loan.

In that case, what usually happens is that a home buyer doesn't have enough of a deposit to get a large enough loan, or has to pay Lender's Mortgage Insurance. So the guarantor signs a contract, and essentially offers up their home - or a large amount of cash - as the acceptable security for the deposit.

But remember - the borrower still needs to have their own security, which will in almost every case be the property you're about to purchase.

Short story: that means if you don't pay the loan, then the guarantor's asset - whether it be their home or cash - can be taken by the bank.

It isn't to be taken lightly! Someone should only act as your guarantor if they have a good expectation you can actually pay it off. (Guarantors should always seek independent legal and financial advice.)

Another option is Bank First’s First Start Shared Equity Agreement. First Start is an ideal way for parents to help their child into the property market while protecting the interests of all parties.

What to know about security:

In the end, this isn't going to change too much about how you go about buying a home. Just remember that when you buy a home and take out a loan, the bank sees your property as security against that loan.

So it's always a good strategy to pay it off, as quickly as possible!