Quick answer
Third-party security means someone other than the borrower, such as a parent, spouse, fellow director or related company, offers their property to secure your business loan. They sign a mortgage or caveat over their title and usually a guarantee. If the loan isn't repaid, the lender can look to them and their property, so each owner should understand the documents and get their own legal advice.
Key points
- A parent, spouse, business partner or related entity can offer their property
- The property owner signs the mortgage and usually a guarantee
- A guarantee can make the owner liable for the whole debt, not just the property
- Independent legal advice for each guarantor protects everyone
- A clear exit plan that releases their property early is the kindest structure
- Amounts
- $20k – $5m
- Security
- Residential, commercial or industrial property
- Position
- First mortgage, second mortgage or caveat
- Exit
- Clear exit strategy required
Sometimes the business owner needing the money doesn’t hold the property that could secure it, or holds some but not enough. A parent’s paid-off home, a co-director’s investment unit or a related company’s warehouse can bridge that gap. This is called third-party security, and it’s a legitimate, common way to fund a business. It also asks a lot of the person offering their property, so it pays to set it up in a way that protects the relationship as well as the deal.
What is third-party security?
It’s any arrangement where the person or entity that owns the property is not the borrower. Common examples:
- a parent or other relative securing a son’s or daughter’s business loan
- a spouse or partner whose name alone is on the title
- a fellow director or business partner offering personally owned property
- a related company or family trust supporting a group entity
business.gov.au’s guidance on business loans lists working out “who will guarantee your loan if you need a guarantor” as part of preparing to borrow. In secured private lending, the guarantor and the property owner are usually the same person.
What does the property owner actually sign?
Usually two documents, and it’s important they understand both:
| Document | What it does | What it means for the owner |
|---|---|---|
| Mortgage (or caveat) over their title | Gives the lender security over their property | The lender can look to that property if the loan isn’t repaid |
| Guarantee | A personal promise to pay if the borrower doesn’t | They may be personally liable for the debt, not just the property |
| Acknowledgement of legal advice | Confirms they’ve had the documents explained | Protects them and the lender from later disputes |
Moneysmart, ASIC’s consumer site, is blunt about what being a guarantor can mean: the lender can ask you to repay all of it, and the assets you’ve offered, including your home, may be sold if the debt isn’t recovered. It also notes that a guarantee may affect the guarantor’s ability to borrow for themselves later.
That isn’t a reason to avoid third-party security. It’s a reason to be straight with the person helping you about what they’re agreeing to.
Why should each guarantor get their own legal advice?
Because it protects everyone. Moneysmart recommends getting independent legal or financial advice before guaranteeing a loan, and lists a lack of advice, misunderstanding the risks or being placed under pressure among the grounds on which a guarantee may later be challenged.
For a private lender, a guarantee that could be set aside is weak security. For the family, a guarantee signed without understanding is a relationship risk. Independent advice solves both problems. A few practical points:
- The guarantor’s solicitor should be separate from the borrower’s solicitor.
- They should see the loan agreement, not just the guarantee, so they know the amount, term and exit.
- They should know when and how their property will be released.
How can the deal be structured to protect the person helping?
The most considerate third-party deals are designed so the helper’s property is on the line for as short a time, and for as little of the debt, as possible.
- Use your own property first. If you have equity of your own, the third-party title can top it up rather than carry the whole loan. See using multiple properties as security.
- Agree a release price up front. Set the amount that, once repaid, frees the helper’s property from the mortgage while the rest of the loan continues on your own security.
- Check what the guarantee covers. Moneysmart notes it’s sometimes possible to guarantee only part of a loan. Whatever is agreed will be in the document, so read the amount and end date carefully.
- Have a believable exit. A solid exit strategy, such as a contracted sale, a bank refinance or a known payment, matters more when someone else’s home is involved.
Illustrative example: a Melbourne café owner needs $250,000 to clear an ATO debt and fit out a second site. She owns her apartment, assessed at $650,000 with $380,000 owing. For this example only, suppose total secured debt on her apartment is kept to 70% of value, which allows about $75,000 behind the bank. Her parents’ debt-free home, assessed at $1,400,000, provides the rest. The loan is set up so that once $175,000 is repaid, planned from a bank refinance once the new site has a year of trading behind it, her parents’ home is released. Her parents see their own solicitor and know from day one how and when they get out.
Does it matter if the third party owns the property through a company or trust?
The principles are the same, but the paperwork grows. The entity signs the mortgage and guarantee, its directors or trustee give personal guarantees, and the lender reads the company records or trust deed to confirm the entity is allowed to support someone else’s loan. Our page on company or trust owned property covers that in detail.
What if the guarantor has their own debts or a credit history?
Their property is assessed like any other security: what it’s worth, what’s already owing on it, and where the new loan would rank. If their own bank already holds a first mortgage, the support might come through a second mortgage or caveat. Past credit issues for the borrower or guarantor are considered case by case; equity and a clear exit carry the most weight.
Not sure which form of security suits your situation? The 60-second secured loan quiz points you to first mortgage, second mortgage or caveat, and you can then send an enquiry with both properties listed.
Someone willing to back you? See if you qualify
Before anyone signs anything, get a straight read on whether the deal works. Tell us who owns each property, roughly what each is worth, exactly what’s owing against each, and what the money is for. A specialist will set out how the security could be arranged and how the third party’s property would be released.
There’s no credit check when you enquire, and your details, and theirs, aren’t passed around a list of other funders. A real person at the direct lender reviews every enquiry. Amounts start at $20k and go up to $5m. Nobody has to pay for a valuation report on either property, and with documents in hand, funding is possible in 24–48 hours.
Frequently asked questions
What's the difference between a guarantor and a third-party mortgagor?
A third-party mortgagor puts their property up as security. A guarantor promises to repay the debt if the borrower doesn't. In business lending the same person is usually both, which means their property and their personal promise are on the line.
Can my parents use their home to secure my business loan?
Yes, if they own it and agree to sign. The loan must be for a business purpose, and your parents will sign a mortgage or caveat over their home and, usually, a guarantee. They should get legal advice separately from you before they sign.
Can the guarantee be limited to a set amount?
Moneysmart notes that it is sometimes possible to guarantee only part of a loan. Whatever is agreed will be written into the guarantee itself, so the guarantor and their solicitor should check the amount and the end date before signing.
How does the guarantor get released?
When the loan is repaid in full, the lender discharges its mortgage or withdraws its caveat and the guarantee ends. If the structure allows, part of the loan can be repaid early to release the third party's property while the borrower's own security remains.
Will the guarantor's credit history be looked at?
There's no credit check when you first enquire. When the deal proceeds, the lender looks at everyone giving security, but the focus is on the property, the equity and the exit. Past credit issues are considered case by case.
Can a fellow company director offer their personal property?
Yes. A director or business partner can offer personally owned property in support of the company's loan. They sign the mortgage and a guarantee in their personal capacity, and the same advice and release planning apply.