The owner borrows nothing, and can still lose the house.
BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED
A third-party mortgage is the document a parent, a director or a family trust signs when their property is to secure a company's borrowing. The owner borrows nothing and runs nothing, yet if the business fails and its own assets fall short, the lender's shortfall is met from the sale of their land, up to whatever ceiling the document sets. For the owner, the questions are how far the security reaches and what else they signed beside it. For the lender, the question is whether the signing will survive a challenge, because security given by someone who did not understand it may not hold.
BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.
Issue 03 — Kauri Dairy Holdings. The patriarch is retiring. The bank hears about the succession plan from the accountant first. Your call first, then the senior banker's.
A young business often has more need for credit than assets to support it. Its plant is specialised, its stock turns over, and its debtors are worth what they collect. A lender asked for more than that security will carry looks for value outside the company, and the nearest value is usually a family home: the director's own, or a parent's who wants to help. The owner is not the borrower and may have no say in how the business is run. What they give is a charge over their land in favour of the lender for the company's debt.
For the lender, land is the security whose value it can most readily check and rely on. For the owner, it is usually the largest thing they have. That asymmetry is why the document is handled as carefully as a personal guarantee, and in some respects more so: a guarantee asks for money the guarantor may or may not have, while a mortgage names the house.
Three choices in the documents decide the owner's exposure. The first is what the mortgage secures. An all-monies mortgage secures everything the borrower owes the lender, now and later, so it can reach a facility added years after the owner signed. A limited mortgage caps what the lender may recover from the property, usually at a stated sum plus interest and enforcement costs.
The second is whether the owner also promises to pay. A mortgage on its own gives the lender recourse to the property and nothing more: once it is sold, the owner's exposure ends. If the document also contains a covenant to pay the borrower's debt, or the owner signs a guarantee alongside it, the lender can pursue the owner's other assets for any shortfall the sale leaves.
The third is the owner's position after paying. The general law treats an owner whose property secures another's debt much like a surety: a right to be repaid by the borrower and, once the lender is paid in full, to stand in the lender's place against the borrower's own security. The documents often defer those rights until the lender has been paid everything it is owed.
A joinery company, constructed for this page, borrows against its own plant and debtors under a general security agreement. To lift the limit, the director's parents mortgage their home, worth US$1.2m and otherwise unencumbered. Two versions of the document are compared: one limited to US$500,000 plus interest and costs, and one all-monies with no limit. Three years later the company fails. Every figure is the example's.
The limit is worth US$150,000 to the parents, and the lender carries the remaining US$150,000 of shortfall unsecured. Had the home sold for a net US$550,000 instead, the unlimited mortgage would leave US$140,000 of the claim unpaid. With nothing but the mortgage, the lender's recovery from the parents stops there. With a covenant to pay or a guarantee, it can sue them for the US$140,000 and look to their savings.
A guarantee is a promise to pay. Unless it is backed by security, the lender who calls it must sue for the money and then find assets to enforce against, competing with the guarantor's other creditors. A third-party mortgage is the reverse: an interest in a named asset, enforceable by sale, with no personal promise unless one is added. Lenders often take both, so that the property is the first source and the promise the second.
For the owner the difference is how far the risk can reach. A mortgage alone puts one asset in play and leaves the rest of the owner's affairs alone. A guarantee, limited or not, can reach everything the guarantor has. An owner asked to sign both should know which document is doing the work.
DEFINED IN ONE PARAGRAPH → · PERSONAL GUARANTEES → · THE INDEPENDENT ADVICE CERTIFICATE →
The risk to the lender is not that the property is worth too little, but that the security is set aside. Courts in all three markets have refused to enforce guarantees and third-party securities where the owner's consent was procured by undue influence or misrepresentation, and Australian courts in particular have done so where the lender took unfair advantage of an owner at a special disadvantage. In the UK, the House of Lords held in Etridge (2001) that a lender is put on inquiry whenever the relationship between the person giving the security and the debtor is non-commercial, and set out the steps that protect the lender, centred on a solicitor's confirmation that the owner was advised. Australian and New Zealand courts apply their own established doctrines to the same facts.
In Australia, where an individual gives a guarantee or indemnity for a loan to an individual or small business covered by the industry's Banking Code of Practice, the Code adds process: the owner receives the loan contract and the borrower's financial information, the lender does not accept the guarantee until the third day after providing that information unless one of the Code's exceptions applies, and a mortgage given in connection with the guarantee is not enforced until the borrower's own security has been, subject to exceptions such as an expected shortfall on that security. A file that cannot show the owner was told, advised and unhurried is a file whose best security may not hold. Issue 03 tests the same question on a family trust's land offered for two companies' debts.
ISSUE 03 · THE SUCCESSION → · WHAT YOUR BANK HOLDS AS SECURITY → · THE LIMITED GUARANTEE →
The documents the statements on this page rest on. Each was opened and checked when cited.
THE IN-TRAY · ONE MINUTE
A short file on the ground this page covers. Every option opens with how far it sits from a senior banker’s read.
A company fails. One lender is secured over the plant; the other is unsecured. The receiver's realisations, after costs, are below. There are no preferential claims.
1 FILES · PICK A CALL ON ANY OF THEM
7 MORE ON THE LOAN · PROTECTION →WHERE DO YOU READ FROM? THE PLACEMENT →
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