Quick answer
An encumbrance is a right or interest that someone other than the owner holds over an asset, limiting what the owner can freely do with it. On land, common encumbrances are mortgages, caveats, leases, easements and covenants, recorded on the title. On equipment, vehicles and stock, the equivalent is a security interest registered on the PPSR. Lenders check encumbrances to see what security is genuinely available.
Key points
- Land encumbrances show on a title search; personal property ones on the PPSR
- Mortgages and caveats affect borrowing most; easements and covenants affect value
- An asset with no encumbrances is described as unencumbered
- In South Australia, an 'Encumbrance' is also a specific registered instrument
Pull a title search on almost any business property and, below the owner’s name, you’ll find a list of other people’s interests: a bank’s mortgage, perhaps a drainage easement, maybe a lease to a tenant. Each one is an encumbrance, a claim or right that someone besides the owner holds over the asset and that travels with it.
The main types
| Encumbrance | Where it’s recorded | Effect on borrowing |
|---|---|---|
| Registered mortgage | Land title | Ranks ahead of later lenders; may need consent for a second loan |
| Caveat | Land title | Blocks conflicting dealings until withdrawn |
| Lease | Land title (if registered) | Can raise or lower the valuation, depending on the tenant |
| Easement | Land title | Usually minor; a large one can reduce usable land |
| Restrictive covenant | Land title | Limits use or building; may affect development value |
| Security interest | PPSR | Gives a lender rights over equipment, vehicles, stock or receivables |
Land Use Victoria’s glossary uses mortgages, easements, leases and restrictive covenants as its examples. South Australia adds a twist: under its land titles system, an “Encumbrance” is also a particular type of registered document, which often carries restrictive covenants controlling how the land can be used or developed. So an SA title can carry an instrument literally called an Encumbrance.
Why lenders read the encumbrances first
A lender taking security wants to know two things: what else is already registered, and where its own claim would rank. A clean, unencumbered title is the simplest security there is. A title with a first mortgage still allows a second mortgage, but the new lender sits behind the first and is only paid from what’s left after it.
Some encumbrances are harmless. A sewer easement along the back fence rarely changes anything. Others need action before money moves. An old caveat that a former lender never withdrew, or a mortgage that was repaid years ago but never discharged, will usually have to be removed through a discharge of mortgage or caveat withdrawal before a new lender will settle.
Equipment works the same way through the PPSR. If a general security agreement registered by your bank covers all present and after-acquired property, a new equipment financier may want a priority arrangement before it funds.
A worked example
A Toowoomba transport operator wants to borrow $150k against the depot it owns, valued at $900k. The title search shows:
- a first mortgage to its bank, with $410k owing
- an easement for power lines across one corner
- a caveat lodged in 2021 by a private lender whose loan was repaid in 2022
The easement doesn’t trouble the new lender. The bank’s first mortgage means the loan will be a second mortgage, which works on the equity available. The stale caveat is the hold-up: the old lender has to sign a withdrawal before settlement. One phone call and a signed form later it’s gone, and the loan settles a week after that.
Working out what’s free to borrow against? Our property equity calculator gives a quick estimate, and we can look at your title situation with you.
Got equity sitting behind an existing loan?
Plenty of owners assume a mortgaged property is off limits. Often there’s room behind the first lender. Give us the property, what’s owed and what you need. The form is a minute’s work, and your credit history isn’t pulled when it lands. It also stays with us, not with a queue of lenders. One of our people studies it and rings you. List every loan you know of against the property so the structure we suggest is one that will actually settle.
Frequently asked questions
How do I find out what encumbrances are on my property?
Order a title search from the land registry in the state where the property is, either directly or through an information broker. It lists registered mortgages, caveats, leases, easements and other interests. For equipment and vehicles, search the PPSR.
Can I borrow against a property that's already encumbered?
Often, yes. A second mortgage or caveat loan sits behind an existing first mortgage, provided there's enough equity. Easements and covenants rarely stop a loan but can lower the valuation. An undischarged caveat from an old lender usually has to be cleared first.
Does an encumbrance stop me selling?
Not legally, but buyers expect a clear title at settlement for mortgages and caveats, so those are normally paid out and discharged from the sale proceeds. Easements and many covenants pass to the buyer and stay on the title.
Is a lease an encumbrance?
Yes. A registered lease gives the tenant an interest in the land. For a lender valuing commercial property, a long lease to a strong tenant can be a positive, while an unusual lease may restrict who will lend against it.
What does it mean if equipment is encumbered?
It means someone, usually a finance company or a lender holding a general security agreement, has a registered security interest over it. If you're buying second-hand equipment or a business, check the PPSR so you don't inherit someone else's claim.