What a second mortgage is
A second mortgage is a registered mortgage over a property that already has a loan against it. Your existing lender stays in first position and is repaid first if the property is ever sold. The second lender sits behind it, which is why second mortgages cost more than first mortgages.
For a business owner, the main advantage is that you keep your current loan, rate and terms while unlocking the equity above it. That can be cheaper and faster than refinancing everything, especially if your existing rate is low or your current lender won't increase the loan.
Second mortgage or caveat loan
| Feature | Second mortgage | Caveat loan |
|---|---|---|
| Security | Registered mortgage on title | Caveat lodged on title |
| First lender consent | Usually needed | Not always needed |
| Speed | Typically 1 to 3 weeks | Can be days |
| Term | Typically 3 to 36 months | Typically 1 to 12 months |
| Amount | Usually larger | Usually smaller |
Consent from your first lender
Most first mortgages require the lender's consent before a second mortgage is registered. Banks will often give it, but it takes time and some won't agree at all. Your broker will check your current loan terms early so there are no surprises. Where consent isn't available, a caveat loan or a private first mortgage that refinances both loans can be the alternative.
How much you can borrow
Lenders look at the combined loans against the property. Many second mortgage lenders keep the total at or below around 70% to 80% of the property's value, depending on the property type, location and lender. For example, on a property worth $1,000,000 with $450,000 owing, a lender working to 70% could consider a second mortgage of up to about $250,000.
Example only. The lender's valuation and policy decide the final figure.
What it costs
Rates sit above first-mortgage rates, and you'll pay an establishment fee, legal costs and a valuation. Some lenders take interest monthly and others capitalise it. Ask for the total cost over the term you actually expect to need, including any early repayment fees.
Common uses
- Paying out an ATO debt or several expensive short-term loans.
- Funding a business purchase, fit-out or expansion.
- Working capital for a large contract.
- Releasing equity without breaking a low fixed rate on the first loan.
Risks to understand
- Both lenders hold security over the property, and both can take action if repayments stop.
- Short-term second mortgages need a clear plan to repay or refinance before the term ends.
- Default on either loan can trigger action on the other, depending on the documents.