Loan security types: mortgages, caveats and GSAs

What security is for

Security is the set of rights a lender holds so it can recover its money from something other than your promise to repay. If the loan runs to plan, the security never comes into play. If it does not, the type of security decides what the lender can do, how quickly, and which of your assets are exposed.

Property lenders rarely rely on a single document. A typical package might pair a mortgage over land with a security interest over a company's other assets and a personal promise from its directors. Knowing what each piece does lets you see the full reach of what you are signing, rather than focusing only on the property named in the offer.

Registered mortgages

A registered mortgage is the standard form of real property security in Australia. The lender's interest is lodged with the state or territory land titles office and appears on the title, where any buyer or later lender can see it. Under the Torrens system, registration gives the mortgage a clear place in the order of interests, which the mortgage ranking lesson explains.

The practical strength of a registered mortgage is that the law of each state generally gives the mortgagee a power of sale once there has been a default and the required notices have expired. The lender does not usually need a court order to sell, although it must follow the legal process and its own loan terms. When the loan is repaid, the lender signs a discharge that removes the mortgage from the title.

Caveats

A caveat works differently. It is a notice lodged on the title by someone who claims an interest in the land, warning the registrar not to register certain dealings without first notifying the caveator. Lenders use caveats when they have a contractual charge over the property but are not taking a registered mortgage, often because speed matters or because an existing first lender will not consent to another registered mortgage.

A caveat can be effective as a blocking tool, because the owner generally cannot sell or refinance cleanly while it stays in place. As a means of recovery it is weaker. On its own, a caveat generally does not carry a power of sale, so a caveat lender that wants to enforce may need to go to court or rely on a promise in the loan agreement that the borrower will sign a registrable mortgage on request.

Owners also have tools against caveats. In several states an owner can serve a lapsing notice requiring the caveator to take court action within a set period or lose the caveat. The details and deadlines differ between jurisdictions, so check with a lawyer or the land titles office where the property is located. The caveat loans page covers how this kind of lending is usually structured.

General security agreements and the PPSR

Land is only one kind of asset. A business may also own vehicles, machinery, stock, debts owed by customers, shares and intellectual property. A general security agreement gives a lender a security interest over that personal property, often described as all present and after-acquired property, meaning it reaches assets the company buys later as well as those it owns today.

These interests are governed by the Personal Property Securities Act 2009 and recorded on the PPSR, the national Personal Property Securities Register run by the Australian Financial Security Authority. Registration is how a lender generally perfects its interest, which matters for priority against other secured parties and if the company becomes insolvent. A security interest that is not properly perfected can be lost to a liquidator or administrator.

Two practical points follow for borrowers:

• Search the register for your own entity before applying. A new lender will see every existing registration, including old ones from facilities you have already repaid.
• When a loan is paid off, ask the lender to remove its registration. There is a formal process to request removal of a registration that should no longer be there.

Personal guarantees and director's guarantees

A company or trustee borrower has limited assets of its own, so lenders usually want a person to stand behind it. A personal guarantee is a promise by an individual to pay the lender if the borrower does not. Where the individual is a director of the borrowing company, it is commonly called a director's guarantee. The borrower structures lesson explains why lenders ask for one.

Most lenders use a combined guarantee and indemnity. The first limb makes the signer answerable for the borrower's debt if the borrower fails to pay. The indemnity part is a separate promise to cover the lender's loss, which can leave the signer liable even where the borrower's own obligation turns out to be unenforceable. The document may also be supported by a mortgage over the guarantor's home, which turns a personal promise into secured exposure.

Points worth knowing before anyone signs:

• Read how the secured money is defined. Some cover a single facility; many cover everything the borrower owes the lender, now and in future.
• Lenders commonly require each guarantor to obtain independent legal advice and provide a signed certificate from the solicitor.
• If the underlying loan is regulated consumer credit, the National Credit Code gives guarantors some additional rights. A lawyer can explain how these apply.
• A guarantor's obligations generally survive a sale of the security property if a shortfall remains.

Cross-collateralisation and all-moneys clauses

Cross-collateralisation happens when one lender holds security over several properties and treats them as a pool supporting all of a borrower's loans. It is often created through an all-moneys clause, which makes each mortgage secure every amount owed to that lender under any arrangement, including other loans and any personal guarantees given to it.

At the start, pooling can make a deal work. Later it can bind you. When you want to sell one property, the lender may require some or all of the proceeds to reduce other debts, or decline to release that title until the remaining loans still meet its policy. Refinancing a single property to a new lender can become difficult for the same reason. Loan documents often pair this with a cross-default clause, so trouble on one loan can put the others in default.

The main types side by side

A worked description in words

Imagine a hypothetical company that owns a commercial building and wants a short-term loan to buy new equipment. The lender offers funds secured by a first registered mortgage over the building, a general security agreement over the company's assets and a director's guarantee from each of its two owners, with one owner's home also mortgaged in support.

The lender searches the PPSR and finds an old registration from an equipment financier, which must be resolved before settlement. The owners realise that, through the all-moneys wording, the home mortgage would also secure any future loan the company takes from this lender. They ask their lawyer whether the home security can be limited to this facility and released when it is repaid. The business funding secured by property page explains this type of loan more broadly.

Common mistakes

• Treating a caveat loan as a minor arrangement, when it can stop any sale or refinance until it is resolved.
• Signing a guarantee and indemnity without reading the definition of the money it covers.
• Forgetting stale PPSR registrations that a new lender will query.
• Agreeing to cross-collateralised security without asking how individual properties can be released later.

What to ask

1. What security will you take, and over which assets and people?
2. Is the land security a registered mortgage or a caveat, and why?
3. Will a general security agreement cover all present and future company assets?
4. Is each personal guarantee limited to this loan or does it cover all money owed?
5. Does any mortgage include an all-moneys clause, and how can a property be released?
6. When the loan is repaid, how quickly will you discharge the mortgage and remove any PPSR registration?

The preparation checklist helps you gather the entity and ownership documents lenders usually ask for when setting up security.