Loan Tip: What are 'Third Party Mortgages'?

Usually when a person borrows for a home loan they use their own property as security – they give a mortgage to a bank. They would be both borrower and mortgagor.

But sometimes the borrower does not own the property being mortgaged.

There are 2 common examples of this.

Spouses and unit trusts.


Example 1

Homer and Marge are married. Homer owns the property but Marge borrows against it. Homer would have to give a guarantee involving him mortgaging the property for Marge’s loan. Marge cannot mortgage the property as she does not own it.



Example 2

Thelma sets up a fixed unit trust with SLA Pty Ltd owning the property as trustee for the ALS Unit Trust. Thelma is the sole unit holder and she wants to borrow the money – i.e. to have the loan in her own name (to acquire the units in the trust and claim the interest in her own tax return probably).



Thelma doesn’t own the property so she cannot mortgage it. The trustee would need to provide a guarantee offering its property as security.


And I just thought of another one.


Example 3

Developer has approached Homer and Marge and they do a joint vendor to develop the main residence into several properties. The owners of the property will remain Marge and Homer to avoid stamp duty, but the developer will need to use the property as security for a development loan so Homer and Marge will need to give a security guarantee for this loan.


These sorts of loans are generally more difficult to get as they are not so common.


Third party mortgages are where the borrower is different from the mortgagor. There is the borrower, the lender and the mortgagor in the transaction.