Legal Tip 333: Can a lender Come After Other Assets of a Borrower?

Discussion in 'Legal Issues' started by Terry_w, 9th Apr, 2021.

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  1. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    When a borrower can’t pay their loan, under residential finance the lender will be able to take possession of the property used as security for that loan. They can then sell it to recover the money that the borrower owns them.

    Sometimes the security property might have dropped in value and the proceeds from the sale may not be enough to cover what the borrower owes them.


    In this case, it is likely the lender will come after other assets of the borrower. They can do this even if those assets are not held as security for the loan.


    Example 1

    Homer borrows $80,000 from Bank A to buy a property for $100,000.

    He has 2 other properties which are mortgaged to Bank B and Bank C for similar loans.

    Homer can’t afford the repayments anymore and just stops paying the loan repayments to Bank A.

    Bank A take the property and sell it. They incur $20,000 in legal fees, agent fees etc so when they take this from the sale price of $90,000 Homer still owes them $10,000.

    They can then come after Homer to recover this $10,000. It is still a debt that he owes them.

    Bank A might be able to force the sale of the property mortgaged to Bank B. Bank B would be first in line to be paid, but Bank A could take what's left – up to $10,000 (and some more fees)


    Where this is not possible is with non-recourse loans. These loans restrict the lender to only coming after the property that is mortgaged to the lender, not the other assets of the borrower. This is how superfund loans work. But note that they can still come after the assets of the personal guarantor.


    Example 2

    Homer also has a SMSF with a corporate trustee. The trustee has borrowed, through a custodian trustee, with the custodian trustee holding the property being purchased and giving a mortgage over it. This protects the superfund assets as it is not a borrower and not a mortgagor.

    Things go bad with this property too and the fund stops paying the loan.

    The lender takes the security property and sells it. It can come after the other assets of the custodian – which are nil as it is an empty company. It can’t come after the assets of the SMSF.

    But since Homer has provided a personal guarantee, the lender could come after Homer and potentially sell property C to recover their shortfall
     
  2. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    And if loans are crossed they can even consider the need to dispose of the other property or require refinance of the shortfall against the other property. However that new portion of that loan may or may not be deductible. It wont be deductible against the second property as the borrowing wasnt used to acquire that. It is a refinance of the debt shortfall for the one that is being sold. It may be important to split that into a new loan specific to the old property that is being sold. However if the CGT asset that was sold results in a debt shortfall the interest may still be deductible even though there is no further rental income. It may be necessary to sell the dwelling as tenanted to retain that benefit. Tax advice would be sensible.

    The other issue we see with enforced (or lender motivated) sales like that is a fixed rate loan and break costs. They may or may not be tax deducible. If not deductible then they reduce any CGT profit but may lose 50% of the value. Many sellers with financial difficulties may defer the choice to break the loan costs and allow the lender to do that on the settlement date. Thats often a quick way to lose tax deductibility. So get early tax advice.