What is a common reason that additional security is taken for residential loans?

Additional security is often taken for residential loans primarily to avoid lenders mortgage insurance (LMI). When borrowers do not have a substantial deposit (typically less than 20% of the property value), lenders may require additional security to mitigate the risk associated with lending a higher percentage of the property's value. This additional security can either involve securing the loan against another asset or providing a guarantor.

Lenders mortgage insurance offers protection to the lender in case the borrower defaults on the loan. By providing additional security, borrowers can lower the lender's risk, which can potentially eliminate the need for this insurance. This is advantageous for borrowers since LMI adds to their costs and can impact their overall borrowing capacity. The concept revolves around risk management in lending practices, making it a critical aspect of securing residential loans.