Proteases are enzymes that cleave proteins and are crucial to physiological processes such as digestion, blood clotting, and wound healing. Unregulated protease activity is a biomarker of several human diseases. Synthetic peptides that are selectively hydrolyzed by a protease of interest can be used as reporter substrates of unregulated protease activity. We developed an activity-based protease sensor by immobilizing magnetic nanoparticles (MNPs) to the surface of a giant magnetoresistive spin-valve (GMR SV) sensor using peptides. Cleavage of these peptides by a protease releases the magnetic nanoparticles resulting in a time-dependent change in the local magnetic field. Using this approach, we detected a significant release of MNPs after 3.5 minutes incubation using just 4 nM of the cysteine protease, papain. In addition, we show that proteases in healthy human urine do not release the MNPs, however addition of 20 nM of papain to the urine samples resulted in a time-dependent change in magnetoresistance. This study lays the foundation for using GMR SV sensors as a platform for real-time, quantitative detection of protease activity in biological fluids.