The rate is rarely the real problem
If you are assessing a private loan in Australia, the interest rate is usually not the first issue. The real question is whether the security package can be enforced cleanly, with the right documents, in the right order, before the borrower’s position deteriorates.
That is an unfashionable view because rate is easy to compare and easy to market. Enforcement is slower, more technical and harder to explain. But when a deal turns, nobody cares that the coupon looked attractive if the mortgage was not registered, the PPSR was missed, the guarantor did not get proper advice, or another creditor already sits ahead of you.
I have spent more than 20 years around commercial finance, capital raising and hard-edged transactions. Shane St Reynolds has long taken the view that many Australian borrowers and lenders sign too early and inspect the enforcement path too late. That is one reason I wrote Get a Second Opinion Before You Sign.
General information only. Get Australian legal and financial advice on your own facts before signing or advancing funds.
The first document to inspect is the priority map
Before looking at the rate, ask a blunt question: who gets paid first if this goes wrong?
In Australia, that answer may sit across several places at once:
- the title search for real property interests, including registered mortgages and caveats;
- the Personal Property Securities Register for security over personal property under the Personal Property Securities Act 2009 (Cth);
- company searches with ASIC if the borrower or guarantor is a company;
- loan and intercreditor documents that alter practical priority even where registration exists.
This is where many lenders make the basic error. They think “first mortgage” or “secured loan” is enough. It is not. A mortgage over land does not perfect security over all personal property. A PPSR registration does not fix a bad land position. A caveat can preserve notice of an interest, but it is not the same thing as holding a registered mortgage.
If you are taking mixed security, including land, plant, inventory, receivables or shares, you need to know which register covers which asset and whether the registration has actually been done.
A five-point priority check before funds move
- Order a current title search for each property being offered as security.
- Check ASIC records for company status, officeholders and any warning signs around deregistration or external administration.
- Search the PPSR against the correct grantor details. A wrong ACN, ABN or individual identifier can matter.
- Read the existing facility and mortgage terms if there is a prior lender. Some documents prohibit further security or trigger default if another charge is granted.
- Ask for the exact repayment source and whether any other creditor already controls it through account sweeps, fixed charges or assignment of receivables.
The common mistake: thinking a caveat solves an enforcement problem
A caveat is useful, but many people give it magical powers it does not have. A caveat generally gives notice of a claimed interest and can help stop inconsistent dealings from being registered without warning. It does not automatically give you the same enforcement position as a registered mortgage.
If your exit depends on selling land after default, ask:
- Do I hold a registered mortgage, or only a caveat?
- If only a caveat, what is the underlying instrument that supports it?
- Can I force repayment or sale without first going to court?
- Who has power of sale, and under what document?
That last question matters. A registered mortgagee commonly has contractual and statutory enforcement mechanisms available after default, subject to the terms of the mortgage and the governing land titles system. A caveator usually does not stand in the same position.
Counter-intuitive point: a “faster” private deal secured only by a caveat can be slower and messier to recover than a slightly slower deal documented properly with registrable security and a complete settlement process.
Personal guarantees are often weaker than people think
Lenders love guarantees because they sound like extra comfort. In practice, many guarantees are worth less than advertised.
Here is the test: does the guarantor have real balance-sheet strength, and can you reach it efficiently?
Ask for and verify:
- current asset and liability statements;
- whether key assets are jointly owned;
- whether there are existing mortgages, liens or PPSR interests;
- whether the guarantor is already guaranteeing other debts;
- whether the guarantor is an individual, trust or company, and whether the documents match that structure.
For company borrowers, check whether the company constitution and the Corporations Act requirements have been observed for execution. For trust structures, ask for the trust deed and any variation deeds. Many people accept a guarantee from a trust name as if the trust were a legal person. It is not. You need to know the trustee and whether the trustee has power under the deed to borrow, grant security and indemnify itself from trust assets.
If a guarantee is central to the credit decision, do not rely on a summary. Read the execution blocks and capacity wording line by line.
The repayment source matters more than the asset story
A polished borrower can speak for twenty minutes about the value of the property, stock or project. That is not the first question. The first question is: what is the actual source of repayment on the due date?
There are only a few usual answers:
- refinance with another lender;
- sale of an asset;
- business cash flow;
- capital injection from owners or investors;
- litigation or insurance proceeds.
Some of those are far weaker than they sound. “Refinance” is not a repayment source unless you know who the likely incoming lender is, what conditions they will require, and what could stop that refinance. “Asset sale” is not an answer unless the asset is marketable, the title is clear, and sale proceeds are not already spoken for.
This is where many rushed transactions collapse. People underwrite to the asset value and barely test the timeline. But default risk is often timeline risk. If the due date arrives before the borrower can complete the refinance, development approval, subdivision, sale campaign or probate process, the lender is pushed into enforcement.
Three exact questions to ask before signing
1. “What is the named source of repayment on or before the maturity date?”
2. “What document proves that source is realistic right now?”
3. “If that source fails, what enforcement step can I take within seven days without needing the borrower’s cooperation?”
If the answers are vague, the loan is not ready.
National Consumer Credit Protection rules can change the deal
Some lenders act as though every private loan sits outside consumer credit regulation. That is a mistake.
The National Consumer Credit Protection Act 2009 (Cth) and the National Credit Code may apply depending on the purpose of the loan, the identity of the borrower and whether the credit is predominantly for personal, domestic or household purposes, or for residential investment in some circumstances. If the regime applies, licensing and responsible lending issues arise. ASIC is the regulator to watch.
This is not a technical side note. If a lender assumes a deal is purely commercial and it is not, the compliance position can become ugly quickly. The right question is not “is this private money?” but “what is the legal character of this credit?”
If there is any chance the loan strays into regulated credit, stop and get specialist advice before documents are issued or funds are advanced.
The settlement checklist that saves more deals than negotiation does
The best time to solve an enforcement problem is before settlement. I prefer a hard checklist, not verbal comfort.
Use this pre-funding checklist
- Identify every security document: loan agreement, mortgage, general security deed, guarantee, assignment, direct debit authority, corporate approvals.
- Confirm execution is valid: correct parties, correct capacities, witnessing where required, company execution compliant, trustee capacity stated.
- Check registrations required on day one: land registry lodgement, PPSR registration, and any related priority deed.
- Verify payout figures for existing secured creditors and obtain discharge arrangements if priority depends on them being paid out.
- Control the flow of funds: use a settlement statement showing exactly who gets paid, in what amount, and why.
- Set default mechanics in writing: notice periods, default interest, review events, reporting obligations, and rights to inspect or request information.
- Collect proof of insurance where the asset requires it, noting the interested party where appropriate.
- Get the exit evidence: refinance proposal, sale authority, contract pipeline, debtor ledger, or whatever supports repayment.
This sounds obvious. It is not common enough.
Busy borrowers should want this scrutiny too
This article is not only for lenders. Borrowers should want this discipline because weak security and vague exits usually produce worse terms, more fees, more interference and more panic later.
If a lender cannot explain priority, registration and enforcement with precision, that lender may also struggle during a dispute, extension request or settlement crunch. Good borrowers should test the competence of the lender as well as the price.
If you are weighing a private facility, second mortgage, caveat-backed advance or asset-based structure, get the documents and sequence checked before you commit. That is work I do through Poseidon Finance, and I also publish broader commentary at shanereynolds.com.au.
Book a consultation before you sign
If you want a second opinion on a structured finance deal, loan documents, security position or repayment exit, book a consultation before you sign.
Book here, email [email protected] or call 08 6263 6236.