What Creates Security for Your Loan?


WHEN YOU TAKE out a property secured loan, you understand that a lender will register a mortgage against the property that is being secured.

However, typically, when you read through actual loan agreements, the mortgage is just one part of the security that is taken.

In this article, we will be looking at some of the other types of security that lenders will typically request when applying for a loan.

In certain situations some of these securities may be negotiable and you may be able to even relinquish some or all of the securities in some transactions (apart from the first mortgage of course).

It is certainly important to understand what the securities are before going ahead.

Fixed and Floating Charges

If you are borrowing through a corporate structure, banks will usually take a “fixed and floating charge”. Which basically means that they are taking a general security interest over the assets owned by the company.

The “fixed” charge is a secured interest over a “fixed asset”, which in the case of a commercial property would be the land and buildings (possibly with chattels included).

A floating charge is a non-specific security interest over the assets of a company.

If a company contains a mortgaged asset and applies for another mortgage over a new asset, the incoming mortgagee will typically require the original mortgagee to release their charge over the new asset.

Banks will generally require fixed and floating charges over a borrowing entity — although some non-bank lenders do not require it when a mortgage is registered over the property.

This is also true for equipment funding.

For corporate borrowers containing significant assets within those trading businesses, you should consider the security position as an important factor — when deciding which loan to take out.

Personal Guarantees

Many business owners and investors sign personal guarantees when they take out a loan, which is expected and often necessary, but it is important to understand the risks associated with providing such guarantees.

It is also important to understand the different types of personal guarantees that may be required by a bank to get a loan.

Banks request personal guarantees over most loans as collateral to the mortgage. Providing this security makes the guarantor individually liable for the whole debt.

If the borrower is a company, it provides the bank extra security in that the guarantor can be bankrupted if the debts are not able to be fully recovered from the sale of a property.

BOTTOM LINE: These are just two of the forms of security that lenders may take above the mortgage provided for a commercial loan.

Therefore, it’s vital to make sure you fully understand the terms of your agreement. And only sign it, if you know exactly what your are liable for.

In next week’s article, you’ll learn about five other types of security lenders may request.


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