When you take out any sort of personal loan, it will usually be secured against something – a home loan is secured against your home, a car loan is secured against your car, and so on. But different loans come with different rules about what the lender can do with those securities in the case of a default.
What are recourse and non-recourse loans?
Say you take out a $10,000 loan using your $5,000 car as security against it and, after having made $4,000 in payments, you are no longer able to meet the required payments on your loan and end up defaulting. With any kind of loan, your lender is legally allowed to take your car and sell it in order to try to make up the difference – but in this case they’d still be $1,000 short of the amount owing, assuming they were able to sell the car for the $5,000 market value. Here’s what happens from that point, depending on whether you have a ‘non-recourse’ or ‘recourse’ loan.
In the case of a non-recourse loan, the lender has no protection against potential loss except for the security against the loan. If the security is sold and the lender is still at a loss, that’s the end of the story – they have no further recourse against the borrower when it comes to recouping their losses, hence the name. So in this situation, the lender can seize and sell your $5,000 car, but after that will not be legally allowed to seize any of your other assets in order to make up for the outstanding $1,000.
Non-recourse loans have the potential to benefit the borrower more than they do the lender, but generally come with higher interest rates and generally have more stringent approval criteria. Non-recourse loans were a contributing factor in what became known as the ‘jingle mail’ practice, most prevalent in the US, where borrowers would simply choose to default on their home loan repayments; the name comes from the idea of sending your house keys back via mail, in which case the envelope would literally jingle.
The table below displays a snapshot of the lowest rate 5-Star rated variable home loan products on Canstar’s database. This table is sorted by ‘current rate’ (lowest to highest), then by provider name (alphabetically).
Source: Canstar. Based on residential standard variable home loans available for a loan amount of $350,000 at 80% LVR, and available for Principal and Interest repayments.
Can you get a non-recourse loan in Australia?
Non-recourse loans are reasonably rare in Australia – a vast majority of lenders don’t offer them and many of the handful that do, such as Crown & Gleeson, are specialty commercial lenders. The closest thing you’ll generally be able to get in Australia, especially if you’re borrowing through an SMSF, is a limited-recourse loan which provides the lender with ways of recouping their losses if the borrower defaults – but this is usually limited to the sale of specific assets rather than any assets held by the borrower.
Recourse loans on the other hand permit the lender to fully recoup their losses, which they can do in several ways. They may choose to seize other assets, or pursue legal action order to seek financial damages. Recourse loans are the norm in Australia – all Australian mortgages are full recourse and our responsible lending laws more or less exclude non-recourse loans of any kind from being offered as a product.
That being said, as mentioned earlier you may be able to access limited-recourse debt depending on your individual circumstances and borrowing requirements.
If you’re looking for a home loan, you can compare with Canstar to find the best-value home loan for you.