Property Security Types and how they are treated by lenders

Lenders offer different amounts (LVRs) depending on the property type that they are taking security over via Mortgage. The reason why these amounts differ are due to a concept known as ‘Loss Given Default’.

Loss Given Default

Loss Given Default refers to the estimated amount of money that a lender loses when a borrower defaults on a loan. When a lender enforces their mortgage rights by selling the property, they are doing so as a ‘fire sale auction’ where the aim is to recover the funds previously lent as soon as possible. There are costs involved in doing so such as:

• Legal Fees

• Auctioneer Fees

• Real Estate Agent Fees

When dealing with more specialized properties, lenders as a result, offer less funds as they have a more limited market to sell the property to in the case of a loan default.

Residential and High Density Property Types

The most common form of property security is residential property. Examples of these include:

• Houses

• Apartments

• Townhouses

Most lenders are willing to take security over these properties with non-bank lenders focusing on areas with a population size of at least 10,000.

High Density Properties are generally apartments and the general lender parameters are based on:

• The amount of apartments in the complex

• The size of the apartment (most lenders will not accept an apartment smaller than 40m2)

• How many floors the apartment complex has

Additionally, certain postcodes are classified as High Density and are dependent on the lender.

When dealing with High Density properties, many lenders will generally offer a lower loan amount (65-80%). This is because there is generally multiple apartments listed on the market in the same complex at any given time which effects the lender’s ability to recoup the money lent.

Standard and Specialized Commercial Properties

Commercial Properties are generally categorized into either ‘Standard’ or ‘Specialized’ commercial properties. Standard are any properties (i.e. Office space, Warehouse etc.) which you can sell to the market at an auction in case of loan default and Specialized are properties (i.e. farms, vacant land, childcare centres etc.) that would be hard to sell to the market at an auction. Many lenders offer lower loan amounts for Specialized properties (50-70%) due to Loss Given Default.

At Loan Central Hub, we are experts at navigating lender policies to match you with the best product in the market. Whether you are just entering your finance journey and are looking for a pre-approval, or require assistance with a recent property purchase, we are here to help.