A guide to lender securities in Australia - what borrowers & lenders need to know

Securities play a pivotal role in the lending process, acting as a safeguard for lenders while also influencing the terms and accessibility of credit for borrowers. By offering security, borrowers may be able to negotiate better interest rates or loan conditions, as the lender's risk is reduced. Providing security also means that the pledged asset is at risk if repayment obligations are not met, giving the lender a recourse should there be a default under a relevant agreement.

This article presents an overview of the various forms of securities utilised by lenders to protect their interests when extending credit, encompassing both established mechanisms such as mortgages and personal guarantees, as well as alternative instruments including equitable mortgages, pledges, caveats, and assignments of income.

Traditional securities over property

Traditional securities represent the well-established methods with which most lenders and borrowers are familiar with.

Mortgage

A mortgage serves as the principal example. It provides the lender with a legal interest in the property until the debt, including interest, is fully repaid. In the event of default or missed payments, the lender is entitled to repossess and sell the property to recoup the outstanding amount. Although mortgages are typically taken over real estate properties (whether they be residential, commercial or vacant land), in New South Wales, an agricultural borrower can also grant a mortgage to its lender over any water access licences held by that borrower. Often, there may be more than one mortgage on, or proposed to be given over, real estate. In this situation the borrower, incoming lender and the current lender may enter into a subordination deed to ensure the current lender as mortgagee will be paid out everything it is owed first before the incoming lender can be paid under its mortgage.

Personal Property Securities

In Australia, lenders may take security over “personal property” - that is, property other than land or fixtures - by registering their interest on the Personal Property Securities Register (PPSR). Established under the Personal Property Securities Act 2009 (Cth) (PPSA), this system enables lenders to claim certain non-land assets if a borrower fails to meet repayment obligations. Personal property under the PPSA encompasses a wide range of assets, including:

• Vehicles: Cars, trucks, motorcycles, boats, and aircraft may be offered as security.

• Business equipment: Machinery, computers, office equipment, and tools.

• Inventory and stock: Goods held for sale by a retailer, such as clothing in a boutique or electronics in a store, may be secured under a floating charge.

• Accounts receivable: Money owed to a business by its customers (for example, unpaid invoices) may be pledged as security, which is common in business loans where future income streams are assigned to the lender.

• Intellectual property: Patents, trademarks, copyrights, and registered designs may be subject to a security interest. For example, a technology company might use its patents as collateral for a loan.

• Livestock and crops: Farmers may use livestock or harvested crops as security, with the lender registering an interest over these assets on the PPSR.

• Shares and other financial instruments: Securities, shares, bonds, or units in managed funds may be classified as personal property for loan security purposes.

The PPSR provides public notice of a lender’s claim, protecting their rights and informing others that the property is subject to some form of security. For borrowers, it is crucial to be aware of which assets are listed on the register, as this may impact their ability to sell, transfer, or grant further security over those assets. A wise borrower will conduct a PPSR search on itself to confirm that any security interests registered should continue to be registered against them (for example, the secured party may have been paid out some time ago), and seek removal of any ‘old’ or no longer relevant registrations.

Personal Guarantee

On occasion, a lender may seek additional assurance by requesting a personal guarantee. This arrangement involves a third party - for example, the directors of a corporate borrower - undertaking to repay the loan should the borrower be unable to do so. A personal guarantee may contain charging clauses that create a security interest over the guarantor’s real estate or personal property. In the event of default, the lender may pursue the guarantor’s personal assets, such as their family home or vehicle.

Non-traditional securities over property

As lending practices have evolved, so too have the mechanisms available to lenders for securing loans. Non-traditional securities represent more recent or less conventional methods, designed to meet the needs of unique properties or specialised circumstances. Some examples of these securities are outlined below.

Equitable Mortgage

An equitable mortgage differs from a conventional mortgage, as it may not be formally registered against the title to the property. Rather, it is established by transferring the title deeds of the property to the lender. Although the borrower retains legal ownership, the lender holds the deeds as evidence of their security interest. Should the borrower default, the lender may apply to the court for permission to sell the property in order to recover the debt. This approach is often adopted when formal registration is impractical or when prompt funding is required. For example, a borrower in need of rapid access to funds may arrange an equitable mortgage as an interim solution. Equitable mortgages may also be protected by a lender lodging a caveat over the property. The caveat acts as a ‘warning’ to third parties that there is an interest in the property by another.

Pledge

A pledge involves the physical delivery of an asset or proof of ownership to the lender as collateral for a loan. While commonly associated with shares, pledges may also relate to property documents. The lender retains possession of the pledged items, and in the event of default, may sell them to recover the outstanding sum. For instance, a borrower may pledge share certificates associated with an investment property, or a business may pledge valuable machinery to secure financing.

Caveat

A caveat is a formal notice lodged at the land registry that serves to alert others to the lender’s interest in a property. It does not transfer ownership nor carry an automatic right of sale, but it prevents the borrower from selling or transferring the property without the lender’s consent. The caveat acts as a public declaration of the lender’s claim, restricting dealings with the property until the claim is resolved and ensuring the lender’s interests are safeguarded. To sell property against which a caveat has been lodged but which is not supported by a mortgage, a caveator would need to apply to the court for a judicial order for sale.

Assignment of Rents or Income

Rather than taking direct control of the property, a lender may seek assignment of the income generated by it, such as rental payments from tenants. In this arrangement, the lender is entitled to collect income directly until the loan is repaid. This method is frequently employed by commercial property owners and provides lenders with ongoing cash flow, thereby reducing their risk.

Key takeaways for borrowers

• Securities provide protection for lenders by granting them rights over a borrower’s assets should they fail to meet repayment obligations.

• Traditional securities, such as mortgages, personal guarantees, and interests registered under the PPSR, are well-understood and widely utilised, offering formal and transparent protections for both parties.

• Non-traditional securities, including equitable mortgages, pledges, caveats, and assignments of income, are less prevalent but may be advantageous in particular circumstances or for innovative financing arrangements.

• Thoroughly review and understand loan agreements, as each type of security involves distinct risks and consequences.

• The nature of the security provided may affect a borrower’s ability to sell, transfer, or further encumber their property, so it is prudent to consider both immediate and long-term implications.

Each form of security carries unique legal and practical consequences, which may materially impact rights and future financial flexibility. Whether considering a traditional mortgage, personal guarantee, or exploring less conventional mechanisms such as caveats or income assignments, it is essential to understand your responsibilities and the possible outcomes.

Have questions about lender securities or your obligations? Reach out to our finance team for practical guidance tailored to your needs.

Author: Karen Wong

Contributing partner: Rebecca Hegarty

This publication is intended as a source of information only. No reader should act on any matter without first obtaining professional advice.