When you apply for a loan, whether for business expansion, asset purchases or everyday cash flow, the lender will usually insist on loan security.
Loan security reduces the lender’s risk by giving them enforceable rights over your property or assets. Without it, many lenders will not advance funds.
In Australia, the three most common forms of loan security are:
- mortgages;
- security interests registered on the Personal Property Securities Register (PPSR); and
- personal guarantees and indemnities.
Each works differently and carries distinct risks for borrowers and guarantors. Understanding these differences is essential before agreeing to any finance arrangement.
Mortgage over Real Property
The most common type of loan security is a mortgage over real property. Here, the borrower grants the lender a legal interest over their home, investment property or commercial land. The mortgage will remain in place until the loan is repaid or discharged.
Lenders almost always register a first mortgage. If the borrower defaults, the lender can take possession and sell the property ahead of other creditors. If equity in the property is insufficient, the lender may require additional security such as a PPSR charge or guarantee to ensure recovery.
Our mortgage lawyers can explain how mortgages are prepared, registered and enforced, and help you protect your property interests when dealing with lenders.
Security over Personal Property
Where real property is unavailable or insufficient, lenders often require security over personal property. This may include vehicles, machinery, shares, intellectual property, or even the inventory of a business. These interests are usually set out in a General Security Agreement or a Specific Security Agreement and are registered on the Personal Property Securities Register (PPSR).
Our PPSR services help businesses and individuals register, review or remove security interests, so you know exactly how your assets are affected.
The PPSR system is critical because it establishes the lender’s priority. If a borrower defaults, the lender can seize and sell the secured assets, and registration ensures their rights are recognised ahead of other creditors.
From a borrower’s perspective, granting this kind of security can have long-term implications. A general security agreement often covers “all present and after-acquired property.” This means almost everything you own or later acquire could be caught. This can restrict your ability to borrow further, trade freely or deal with your assets without the lender’s consent.
Before entering into any loan agreement that includes PPSR security, it is important to understand what property will be affected. Our loan agreement lawyers assist with drafting and reviewing agreements, ensuring security clauses are clear and that your risks are properly managed before you sign.
Personal Guarantees and Indemnities
Lenders also frequently require related parties of the borrower – such as spouses or de facto partners, co-owners of assets, company directors, shareholders or trustees – to provide a personal guarantee. By signing, the guarantor promises to repay the loan if the borrower cannot.
In many cases, the guarantee is combined with an indemnity, which goes further by requiring the guarantor to compensate the lender for any loss, even if the underlying loan is unenforceable. It is also common for the guarantee document to include a charging clause, giving the lender a security interest in the guarantor’s own assets. Importantly, lenders can enforce a guarantee and indemnity before exhausting recovery action against the borrower.
The risks for guarantors are significant. Their personal assets, including the family home, may be exposed to claims, and liability can be unlimited unless clearly capped. For this reason, anyone asked to provide a guarantee or indemnity should obtain independent legal advice before signing.
Our guarantee and indemnity lawyers can help you understand your obligations, identify ways to limit liability, and ensure you are not unfairly exposed.
Loan Security and Its Consequences
The consistent theme across mortgages, PPSR security and guarantees and indemnities is that lenders are seeking ways to manage their risk. Each form of loan security achieves that goal in a different way, but all have significant consequences for borrowers and guarantors.
For the borrower, it is the loss of property or personal assets if the loan is not repaid.
For the guarantor, it is the possibility of being held liable for debts they did not personally incur.
Before signing any finance documents, it is important to review them carefully, understand what assets are being offered as security and assess whether the obligations can realistically be met. A failure to do so can have lasting financial consequences.
Common Questions about Loan Security
What risks do I face if I provide loan security?
The greatest risk is losing the secured asset if the loan is not repaid.
For a:
- mortgage, this could mean the loss of your home or investment property;
- PPSR security, it could mean losing valuable business assets, equipment or shares; and
- guarantee and indemnity, it could mean being held personally liable for debts you did not borrow yourself.
Each type of security therefore exposes you to significant financial consequences.
Can I limit or negotiate the security a lender asks for?
In many cases, yes – borrowers can sometimes negotiate the scope of a security interest, limit a guarantee to a certain amount, or substitute different assets as collateral.
The extent to which you can negotiate will depend on your bargaining position and the lender’s policies, but it is always worth asking the question and obtaining advice before signing.
How does a PPSR registration affect me?
A PPSR registration makes the lender’s interest in your personal property enforceable and gives them priority over other creditors.
From your perspective, it can restrict how you use, sell or refinance the secured assets. It also means that if you default, the lender may seize and sell those assets.
Checking and managing PPSR registrations is critical to avoid unexpected restrictions on your business or personal dealings.
Do I have to give a personal guarantee?
Not always – lenders often request guarantees as a condition of lending, but in some cases you may be able to negotiate alternative arrangements, such as providing additional property as collateral instead.
If a guarantee is unavoidable, it may be possible to limit the amount or duration of your liability. Independent legal advice can help you understand whether the terms are fair.
Can a lender enforce security without warning?
Generally, lenders must comply with notice requirements in the loan agreement or under relevant legislation before enforcing security. However, once default occurs, their rights can be exercised quickly. This may include repossessing assets or enforcing a guarantee before exhausting claims against the borrower. Borrowers should be aware that once enforcement action starts, options for negotiation narrow significantly.
What protections or legal advice should I get before agreeing?
Before signing any loan document, it is vital to understand the scope of the security, the risks involved, and whether your liability can be limited. You should review the loan agreement carefully, check any PPSR registrations, and seek advice on guarantees or mortgages.
Obtaining independent legal advice is especially important, as it ensures you fully understand your obligations before committing.
Our finance lawyers can identify potential issues, negotiate more balanced terms, and protect you from unexpected exposure.