Unsecured notes are a hot topic in 2025 as Australian investors search for higher returns in a low-interest environment. Promising attractive yields but carrying unique risks, these debt instruments are being offered by both established companies and new ventures. But what exactly are unsecured notes, and should they earn a place in your portfolio?
What Are Unsecured Notes and How Do They Work?
An unsecured note is a form of debt investment where the issuer promises to repay the investor a fixed sum at maturity, often with regular interest payments. Unlike secured debt, these notes aren’t backed by physical assets or collateral. If the issuing company gets into trouble, unsecured noteholders line up behind banks and secured creditors — which can make these investments riskier.
- No collateral: There are no assets for investors to claim if the issuer defaults.
- Higher yields: To compensate for increased risk, unsecured notes often pay higher interest rates than secured bonds or term deposits.
- Fixed terms: Maturities typically range from 12 months to five years, with interest paid monthly, quarterly, or annually.
For example, a mid-tier Australian property developer may issue unsecured notes at 9% per annum for a 3-year term, compared to a big bank term deposit at 4.2%.
Why Are Unsecured Notes Back in Focus for 2025?
Several trends are putting unsecured notes in the spotlight:
- Persistently low cash rates: With the RBA’s cash rate steady at 4.35% as of March 2025 and few signs of a significant hike, investors are looking beyond traditional savings products for yield.
- Corporate funding demand: Many medium-sized Australian businesses, especially in property and fintech, are issuing notes to raise capital in a tight lending market.
- Regulatory changes: ASIC’s 2024 reforms require more transparent disclosure for retail note offerings, but wholesale (sophisticated) investors still face caveat emptor conditions.
In 2025, some issuers are even offering ‘green’ unsecured notes, promising to fund sustainable projects and appeal to ESG-focused investors.
Risks and Rewards: What Investors Need to Watch
Unsecured notes can offer attractive returns, but the risks are real. Before jumping in, consider:
- Credit risk: If the issuer fails, noteholders may recover little or nothing. Always scrutinise the company’s financial health and business model.
- Liquidity: Unsecured notes are usually not traded on the ASX or any secondary market. You may be locked in until maturity.
- Regulation: While ASIC has tightened rules on advertising and disclosure (including the Product Design and Distribution Obligations rollout in 2024), not all offerings are created equal. Some notes are only available to sophisticated investors, who have less regulatory protection.
- Tax treatment: Interest income from unsecured notes is taxed at your marginal rate, which can impact net returns for high-income investors.
Real-world example: In 2023–24, several high-profile collapses in the construction sector left unsecured noteholders with significant losses, highlighting the importance of due diligence.
Who Should Consider Unsecured Notes?
Unsecured notes may suit:
- Investors seeking higher fixed income returns and willing to take on higher risk.
- Those with a diversified portfolio who can afford to lose the invested amount.
- Sophisticated investors who understand the product and issuer.
They’re not suitable for anyone needing capital security or instant liquidity, or for those who aren’t prepared to research the issuer thoroughly.
Final Thoughts: Proceed with Caution and Knowledge
Unsecured notes can offer appealing yields, but they’re not for everyone. In 2025, increased regulatory scrutiny and disclosure requirements have improved transparency, but risks remain — especially with newer or less established issuers. If you’re tempted by the returns, make sure you know exactly who you’re lending to, and only allocate what you can afford to lose.
