Second mortgage finance in Australia: how it works and what it costs

A second mortgage is a loan secured against a property that already has a mortgage on it. It is registered on the title behind the first mortgage, so you can borrow against your equity without refinancing the loan you already have, breaking a fixed rate or changing banks.

Aurelius Private are private lending brokers. We arrange second mortgages for Australian business owners, investors and developers and place them with a lender from our panel of private lenders. Most of the questions we get are about cost, how much can be borrowed, and how long it takes. The answer to the last one usually comes down to your first lender's consent.

How a second mortgage works

Your first lender keeps its loan and its place on the title. The second lender registers its own mortgage behind it. You end up with two loans against one property, each with its own rate, term and repayments.

If the property is ever sold to repay the debt, the first lender is paid in full before the second lender gets anything. The second lender only gets what is left. That is why a second mortgage costs more than a first, and why the lender cares so much about how much equity is left after the first loan.

Most private second mortgages are short. Terms usually run six to 24 months, repayments are interest-only, and the loan is paid out in one go when you sell, refinance or the money you are waiting on comes in.

Why people use a second mortgage

Most borrowers already have a first loan worth keeping, on a low rate or with a break fee if they refinance. A second mortgage raises the money without touching it. The deals we see most often:

• Working capital for a business when the bank is too slow or has said no
• Paying an ATO debt or a supplier before it turns into a bigger problem
• A deposit or settlement shortfall on the next purchase
• Funding a fit-out, stock or equipment ahead of money that is already agreed but has not landed. A podiatry clinic in the last stage of a fit-out used a $500,000 second mortgage to finish while the landlord's rebate came through
• Bridging to a sale or refinance that is already under way

The money has to be for a business purpose. Your home can still be the security, as long as the loan is for the business or an investment and not personal spending.

How much can you borrow?

Private lenders size a second mortgage on the combined LVR. That is the first mortgage and the second mortgage added together, as a percentage of what the property is worth. Most lenders on our panel stop at around 75% combined. Strong metro security and a firm exit can stretch to 80%. Regional, rural and specialised property usually sits lower.

Here is how the maths works on a $2 million property with $800,000 owing on the first mortgage:

• 75% of $2 million is $1.5 million
• Take off the $800,000 first mortgage and $700,000 is left
• That $700,000 has to cover the new loan plus any interest and fees that get added to it

So the real borrowing is a bit under $700,000. If the first mortgage is redrawn or the balance goes up during the term, the room shrinks. That is one reason the lender wants a deed of priority, which we cover below.

What a second mortgage costs

Private second mortgages are expensive next to a bank loan. Rates on our panel typically start from around 12% a year and go up with the combined LVR, the type of property and how certain the exit is. A deal at the edge of the LVR range, or on property that is hard to sell, will price well above that. These are indicative figures and the lender sets the final rate.

On top of the rate, budget for:

• An establishment fee, typically 1% to 3% of the loan
• Legal costs for the lender's solicitor, and your own
• A valuation, which you pay for once you accept terms
• Any fee your first lender charges to process its consent

Some lenders take the interest up front or add it to the loan instead of billing it monthly. That helps cash flow, but it uses up borrowing room. On a $600,000 second mortgage at 12%, a year of interest is $72,000.

Every cost is in the term sheet before you commit. If the numbers only work at a lower rate than the security supports, we say so before you spend money on a valuation. Our guide to commercial property loan rates shows where second mortgages sit against bank and first mortgage pricing.

First mortgagee consent: the step that sets the timeline

Consent is where most second mortgage deals stall. Whether the law strictly requires it depends on the state, but most first mortgage contracts say you cannot put another mortgage on the property without the lender's written permission. Go ahead without it and your first lender can treat it as a default. So almost every private lender wants that consent in hand before it settles.

The consent usually comes with a deed of priority. It is a short agreement between the two lenders that sets out how much the first lender ranks ahead for. If the first lender later lends you more, the extra amount does not jump ahead of the second lender. That protects the second lender's position, and it is often a condition of the loan.

What makes consent slow:

• Some lenders, including some banks, refuse private second mortgages behind them as a policy
• Others agree but take 8 to 14 business days to process the request
• Arrears on the first loan, or a combined LVR they think is too high, can turn a yes into a no

Before you spend money on a valuation, we check who your first lender is and how it usually handles consent requests. If it is likely to refuse, or the timing will not work, we tell you up front and look at a different structure.

How long a second mortgage takes

With a complete scenario, we can give you an indicative answer the same day. From accepted terms, a typical second mortgage runs like this:

• Valuation and consent request go in at the same time
• First lender's consent: usually 8 to 14 business days
• Settlement: often within five business days once consent is in hand

That puts most deals at two to three weeks. If you do not have that long, a caveat loan can settle in 24 to 72 hours without the first lender's consent, then be refinanced into a second mortgage once it comes through.

Second mortgage, caveat loan or full refinance?

A second mortgage is one of three ways to raise money against a property that already has a loan on it:

• A second mortgage is registered on the title behind the first. It costs less than a caveat but waits on consent
• A caveat loan needs no consent to lodge, so it is faster. The security is weaker, so it is dearer and shorter
• A full refinance replaces both loans with one first mortgage. It is often cheaper if the first loan is not on a good rate anyway

We compared the first two in detail in caveat loan vs second mortgage. The right choice usually comes down to how much time you have and whether your first lender will consent.

What the lender needs to see

A second mortgage is judged on the property, the purpose and the exit. Your credit file still gets looked at, but it is not the deciding factor. To get started, we need:

• The property address and roughly what it is worth
• Who your first lender is and the current balance, with a recent statement
• How much you need and what it is for
• How and when the second mortgage gets paid out

Most people undersell the exit. "We will refinance" is not an exit until you can say who with and by when. A signed contract of sale, a refinance approval or money that is already agreed is what a lender wants to see. The full list is in our guide to what private lenders require.

Aurelius Private arranges commercial-purpose lending only. If the money is for personal use, the loan is covered by the National Consumer Credit Protection Act and sits with our affiliated brokerage, Aurelius Capital, a credit representative (560751) of Viking Money Pty Ltd (ACL 471435, Viking Aggregation Pty Ltd).

Common questions

Does the first mortgagee have to consent to a second mortgage?

In practice, yes. Most first mortgage contracts say you cannot add another mortgage without the lender's written consent, and going ahead without it can put you in default. Almost every private lender wants that consent before it settles. Whether the law itself requires it depends on the state. The consent usually comes with a deed of priority, which caps how much the first lender ranks ahead for.

What is the maximum combined LVR for a second mortgage?

Usually around 75%. That means the first and second mortgage together cannot be more than 75% of what the property is worth. Strong metro security with a clear exit can reach 80%. Regional, rural and specialised property usually sits lower.

How fast can a second mortgage settle?

Usually two to three weeks from accepted terms. The first lender's consent takes 8 to 14 business days, then settlement is often within five business days. If you need the money sooner, a caveat loan can settle in 24 to 72 hours and be refinanced into a second mortgage later.

Can I get a second mortgage on my home?

Yes, if the money is for a business purpose, such as working capital, a tax debt or a deal. You will sign a business purpose declaration. If the money is for personal use, it is a consumer loan under the National Consumer Credit Protection Act, and Aurelius Private does not arrange it.

Is a second mortgage cheaper than a caveat loan?

Usually, yes. A second mortgage is registered on the title, so the lender's security is stronger and the rate is usually lower. It can also run for longer. The catch is time: a second mortgage waits on the first lender's consent, while a caveat loan can settle in days without it.

Send us the numbers on both loans

Tell us what the property is worth, what is owing on the first mortgage and who it is with, how much you need and how it gets paid back. Submit the scenario and we will tell you the same day whether a second mortgage can be placed, roughly what it will cost, and how your first lender is likely to handle consent. See the second mortgage page for the deal terms we arrange.