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Lawyer Interpretation: Matters needing attention in lending

As you know, in order to support and drive the economy, the Reserve Bank of Australia has lowered the Cash Rate several times. Cash Rate is the interest rate on unsecured overnight loans between banks. The decrease in Cash Rate will cause other interest rates to fall. Although interest rates have fallen, the banks’ requirements for loan approvals seem still as strict as before, many foreigners are still unable to apply.

Due to the tightening of loan policies in the past few years, many people who are slightly unqualified are unable to borrow money from banks. Nevertheless, due to market demand, various fund lending companies and private lending have begun to appear on the market. These are called “Private loans”.

So, if you are considering to borrow money from relatives, friends or other parties, how should you protect your rights as the lender of a private loan so that the money lent and interest agreed can be paid to you on time.  Let’s now explain.

 

Matters needing attention for Lenders

01 Searches

First of all, you should carry out a series of searches to find out if there is any real estate or assets under the borrower’s name, and the scope can even be extended to the borrower’s immediate family, company or trust.

There have been scenarios where the borrower claims that his company has a development project. When the lender hears that the borrower has a project, the lender believes the borrower should be able to repay the loan, so the lender lent the money without investigation. Of course, as long as the borrower keeps his promise by repaying the loan, no dispute will arise. But if the borrower experiences some financial problems, not only that the loan principal and interest cannot be recovered, also the relationship between the parties cannot continue. Therefore, we suggest that the lender should make sure that the borrower has sufficient properties to be mortgaged before considering the amount to lend to the borrower.

 

02 Fluctuation in real estate market

In addition to the value of the mortgaged properties mentioned above, the lender needs to consider the fluctuation in the real estate market. If the loan amount is too close to the value of the real property, then if the borrower defaults at a time when the real estate market has fallen, the lender cannot even sell the property to recover all principal and interest owing under the loan. Market fluctuation is an important factor for you to consider interest rates and default rates.

 

03 Mortgage, caveat and security interest

Mortgage

Generally speaking, being able to register a mortgage on the borrower’s real property is the most secure, because the right that the lender (as the mortgagee) can exercise when the borrower defaults is relatively large, including possession, transfer and sale of the mortgaged property, lease, renovate, sub-divide the mortgaged property, operate a business on the mortgaged property, and obtain rent or other incomes from the mortgaged property so that the lender can recover the principal and interest owing by the borrower under the loan.

Caveat

If you encounter a borrower who disagrees with the lender’s registration of the mortgage document on the property, then you can consider whether you would like to register a caveat on the real property. However, the caveat is not as powerful as the rights conferred by the mortgage. The caveat can only prevent the borrower from selling the property freely. The caveat is also ranked after the mortgages.

Note: In the event that the borrower defaults, the property will be used to repay those loans that are secured by the mortgages first. If there is no balance left from the sale proceeds of the property, then the lender who has only registered the caveat may not receive anything.

PPSR registration (Security interest)

Besides registering mortgages and caveats on real properties, you may also consider registering security interests on the borrower’s personal properties.

 

04 Guarantors

Choosing the right person to be the guarantor under the loan is also an important matter to consider. It does not depend on the number of guarantors, not greater the number of guarantors the better, but rather it is about choosing those guarantors with sufficient assets to ensure that they are able to fulfil the borrower’s repayment obligations when the borrower cannot repay. In order to prevent the guarantor from later denying their guarantee obligations, we will ask the guarantor to seek independent legal advice, and ask the guarantor’s lawyer to sign a document certifying that the guarantor has signed the guarantee document after fully understanding the legal risks of the guarantee.

Tips:

If the lender is a foreigner and the loan is secured by a mortgage, then the lender needs to obtain the approval of the Foreign Investment Review Board (FIRB) before the lender can lend money to the borrower.

To obtain this approval, the lender must complete an application form and pay the corresponding application fee. The FIRB application fee is determined by the loan amount. FIRB approval may also be subject to additional conditions depending on the situation, such as when the lender takes possession of the mortgaged property, FIRB must be notified.

 

Matters needing attention for Borrowers

After the lender agrees to your loan application, they will give you a series of documents for you to sign. These documents are undoubtedly in favour of the lender. So, as the borrower, what should you be paying attention to. Below are some important matters for consideration:

  • Principal – This refers to the amount of the loan;
  • Whether the interest rate is fixed or variable. If the interest rate is fixed, there is generally a fixed term of borrowing. If the loan is cancelled in advance, there may be additional interest and fees payable;
  • Due date and payment method for principal and interest;
  • Default interest – here generally means that if the principal or interest is not paid on time, the lender will charge interest at the default interest rate (usually a very high interest rate);
  • Is there a guarantor:
    • If the borrower is a company, then the lender will generally ask its directors to be guarantors, sometimes even major shareholders may be required to become guarantors;
    • If the borrower is an individual and the lender believes that his/her assets are not sufficient for the loan, the lender will generally require his/her spouse and/or parent to become guarantors. In this case, the risk of the guarantor is relatively large because the guarantor himself/herself does not obtain any direct benefit from the loan, but still needs to fulfill the borrower’s obligations when the borrower fails to repay the loan on time;
    • Being a guarantor may mean that if the borrower defaults, the guarantor needs to sell his/her assets to repay the loan;
  • Whether there is any real estate to be mortgaged:
    • If the borrower owns any real property, the lender will evaluate the property to ensure that the value of the property is sufficient for repayment of the loan, and then will request for a mortgage registration on the property;
    • If the property is mortgaged, then the lender may occupy or sell the property to repay the loan if the borrower fails to repay the loan on time. But the lender does not need to sell the property at a good price when exercising their rights, they only need to sell the property according to the market price at the time. The related costs of the sale, including default interest, will be deducted from the sale proceeds first, and then the sale proceeds will be used to repay the loan. Only when there is any balance remaining from the sale proceeds, then it will be refunded to the borrower;
    • In addition to mortgage the real properties, the lender will generally require the registration of security interest in the borrower’s personal properties. This registration will be displayed on the Personal Property Security Register (PPSR). The lender can possess or sell the personal properties and receive priority payment from the sale. A third party can complete a PPSR search to find out whether there is any registered security interest on the borrower’s personal properties;
  • Whether there are other conditions attached to the loan, such as what documents need to be provided or what conditions must be met before the lender provides the funds, etc;
  • Whether the loan can be repaid early. If so, would there be additional fees or interests payable by the borrower for such early repayment;
  • Is it possible to extend the loan term.

Our service

Whether you are a borrower or guarantor, we can review the loan and guarantee documents for you and advise you of the risks of entering into such agreements. If you are a lender, we can draft loan and mortgage documents according to your requirements and tailored at your needs. The documents will contain terms that protect you as a lender. If you have any legal questions about loans, please feel free to contact us.