Loan Risk analysis - sorry long post

From: Cathy Baxter


Currently applying for 2 loans – 1 for our company / trust entity and the other personally as joint tenants for investment property.

Solicitor has provided all sorts of warnings regarding the terms and conditions of the loans and husband has got cold feet over both loans. Things of concern are eg (loan to company):

“Effect of Default – for non payment of moneys or non-observance of the terms of loan eg non payment of rates, insurance and creditors, keeping property in good repair, compliance with statutory requirements could result in whole of loan becoming repayable immediately, the payment of penalty interest and the right to enter into possession of the security and / or effect a sale.”

“Guarantors – directors to be guarantors” – therefore personally liable and effectively able to take possession of personal assets.

Solicitor says most loans have these clauses – but he doesn’t like them – so are we in a no win – have to accept conditions to get the finance?

Reading the “Memorandum of Provisions” for investment loan (personal) has equally onerous provisions such as: need to advise mortagee of works on property, if property is rented, changes to rental, insurance, payment of rates. They have ability to exercise their right or remedy in any way appropriate, enter the property, recover our personal possessions and get this “fill in any blanks in in this mortgage”!!!! There’s lots of white space!!!

So with regard to the company loan do the majority of loans require personal guarantees from directors?
If so, should we be concerned about their ability to take possession of our assets for issues such as keeping property in good repair (a subjective judgement)? Or other events such non payment to creditors? Is this just the inherent in the level of risk that we have to live with or should we be looking for a better outcome?

Has anyone had experience of financiers playing hardball with compliance to the letter with their mortgages?

I would expect that if you were in default of your mortgage that action would be taken, but if for example you didn’t pay the rates one quarter or were late would they even know or be concerned?

Sorry this is a lot of questions.

But you guys have so much experience and wealth of knowledge I know you can help.

Thanks in anticipation

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Reply: 1
From: Jakk Bass - The SLUM LORD

Hi Cathy,

I have always said that I would one day get around to reading all those "memorandum of provisions" and all the other documentation that comes with the loan application etc etc.
But it looks like you have saved me the hassle. I am usually so keen to get my hands on the money, that I just sign on the dotted lines and ask how long before the lending institution can settle the property.
I am a little horrified that they expect me to keep the lawns trimmed and the gutters cleaned, (I don't even do this on my own home). I have actually been sued for non payment of rates by councils, (I forgot, honestly), and yet not once has any lending institution rang me or wrote me a letter to tell me what a bad borrower I am.
I would suspect though that if I were to fall behind in the loan repayments, they would be coming round and kicking my butt, quick smart.
For what it's worth, I suggest that you don't do anything you don't feel comfortable with, personally all I can say is, Where do I sign and how long do I have to wait to get the sovereigns.


**Furthermore, reading the fine print always gives me headaches**
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Reply: 2
From: Dale Gatherum-Goss

Hi Cathy

This is completely normal behavior for the banks and nothing to get spooked by. Basically, they're saying that you can have the loan in the company name, but, if your company defaults, they'll chase you.

I have never seen the banks waive this clause and neither would I expect them to.

Personally, I think your solicitor needs a kick in the bum for being overly paranoid and cautious. He/She should know better.

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Reply: 2.1
From: Cathy Baxter

Your reply makes me feel so much more comfortable - i tried to convince my husband that he was getting overly excited and that if he read all our previous loan documents he'd see that we'd signed on this basis before. I couldn't see anyway out of it. So looks like we can get the loan that we have been after for months.


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Reply: 3
From: Rolf Latham

Hi Cathy

My opinion is that Dale is correct in that your soli should know that any lender will turn around and say "do you want the loan or not". While you should be advised as to the risks of default, you should also be correspondingly advised "do you want the loan or dont you, since these are standard protective mortgage provisions".

I always like to put the shoe on the other foot too. If it was my money I were lending out, I too would want to be protected.


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Reply: 4
From: Nigel W


With all due respect to your solicitor (that's what lawyers say when they're insulting each other or a judge) he or she needs to get a bit "commercial".

The sad reality is that most of us are not in a position to negotiate on the big issues like getting a loan on terms other than what's in the standard form documents used by the bank. (altho you can wring the occasional minor concession on rates, LVR etc out of em)

Somewhere in the banker's manual it will say "if Loan to Pty Ltd company then get directors' guarantees". Your bank contact is just following the rules that only their chief legal counsel for all Australia could sign off on to waive.

If you had a medium sized business with strong cashflow and heaps of spare equity to give them or were after $50M+ you'd have some negotiating leverage and the banks would be bidding to get your business. Until then just take the best deal you can find from a bank and as the cases sometimes show you're best to try not to read anything!!!

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