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Mortgage Traps: The Bare Minimum Private Lenders Should Consider

August 09, 2021 by Stefanie Lucca

There are many risks involved for private lenders and the following aspects should form a checklist for all mortgagors with respect to the bare minimum that they ought to consider with each and every potential transaction.

  1. Conflict
    Ensure there is no conflict between the parties. If there is an existing relationship with a potential borrower, will this complicate the loan and your practitioner’s ability to act solely in your best interests if your instructions are hindered by personal relationships.
  2. Retainer
    Make sure you understand the retainer provided to you by your legal practitioner. There is a fine line between legal and financial advice. Ensure that you understand the scope of your legal practitioner’s work to enable you to recognise if you need to seek other advice, particularly financial, from the appropriate person.
  3. National Credit Code
    Make sure that you understand the basic concept of the National Credit Code to ensure that you are not lending money without a valid Credit Licence. If you are unsure about the legislation surrounding the National Credit Code, be sure to seek clarification from your legal practitioner.
  4. Guarantors
    In most cases a personal guarantee is required to further protect your interests as a private lender in cases of default. The suitability of the guarantors should be considered and if you are not satisfied with the adequacy of the proposed guarantors, be sure to seek further guarantees before proceeding with the loan.
  5. Security
    You need to ensure that you have considered the security that has been offered. An independent professional valuation of the security from an accredited valuer should always be provided. Ensure that you understand the valuation and seek clarification if you do not. In some cases, the security offered can be found to be inadequate. Do not hesitate to request additional security to better secure your loan.

    Security can be offered in several forms and you should ensure that you are comfortable with the form offered. For example, security can be offered in the following forms:

(a) A first ranking registered mortgage;
(b) A second ranking registered mortgage;
(c) A caveat;
(d) A Personal Property Security; or
(e) A combination of any of the above.

It is imperative to remember that your legal practitioner is there to advise you on the legislation and the documentation surrounding private lending. Financial advice from a financial adviser is also important when considering your own financial position as a private lender. Always ensure you understand your legal and financial position before entering into any private lending agreements.

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