Whether you need to borrow money to grow your business, acquire assets or meet large or everyday expenses, a lender will almost always ask for security before they advance a loan to you in order to minimise their risk and ensure they can enforce the loan if you fail to pay.
So what are the three most common types of security a lender may require for a loan?
Mortgage over real property
The most common type of security a lender will request from a borrower is a mortgage over real property. This is where the borrower (as mortgagor) provides the lender with a security interest over their property.
Generally, a mortgage will remain in effect until the borrower has repaid or discharged the loan.
Lenders will almost always elect to register a mortgage as a first case resort. This allows the lender to exercise its rights over the property where the borrower defaults on repayment of the loan. Rights that can be exercised by the lender can include taking possession of and selling the property.
If there is insufficient equity in the property, lenders will almost always require one or both of the security interests set out below.
Security over personal property
A lender may require the borrower grant an interest over all their present and after acquired personal property. This gives the lender an interest in all the borrower’s tangible and intangible property.
A security interest over personal property includes property such as:
- motor vehicles;
- shares; and
- intellectual property.
It does not include property such as land (or fixtures to land).
It is for this reason that lenders often seek both a mortgage over real property and a security interest over personal property.
Where a lender has a security interest over the personal property of a borrower and the borrower defaults on the loan, the lender will be able to exercise its rights over the personal property. This can include taking possession of and selling the personal property in order to discharge the debt owed by the borrower.
Lenders usually require related parties of the borrower to provide a personal guarantee to the lender as security for repayment of the loan.
Related parties of the borrower include:
- the wife or husband (including a de-facto partner) or family member of the borrower;
- co-owner of any property or asset acquired using the borrowed funds;
- all company directors as well as shareholders (where applicable) of the borrower where it is a company; and/or
- trustees/appointors of the borrower where it is a trust.
By providing a guarantee, the guarantor promises to repay the loan if the borrower cannot.
It is also common for a guarantee document to include a charge provision. A charge provisions ensures the lender receives an interest in the guarantor’s assets as security.
A lender can enforce the guarantee before it exhausts recovery/enforcement action against the borrower.
If you’ve been asked to provide a guarantee, you should read ‘What should you know before agreeing to guarantee a loan?’ prior to providing the guarantee in order to better understand:
- the role of a guarantor;
- the risks of acting as guarantor;
- whether a guarantee can be limited; and
- which documents you should review before agreeing to act as guarantor.
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