As economic conditions tighten, credit to certain business sectors is becoming restricted – some lenders have stopped lending to construction businesses completely. We expect lending standards to tighten further over the next 12 months which could make business loans harder to obtain. Private Lending offers a genuine alternative to business owners who need to secure credit for their business but aren’t able to access funding from major banks or second tier lenders. 2nd mortgages are a type of private lending loan for business owners seeking a fast loan settlement to raise capital or consolidate debts but already have a mortgage against their property.
What is a Second Mortgage?
A second mortgage is a secured loan that uses the equity in your property when there is already an existing mortgage in place – the existing mortgage is referred to as a first mortgage.
Second mortgages are typically fixed rate loans offered by private lenders with loan terms as short as one month but more commonly terms of 6 or 12 months are offered. There are also longer terms available from some private loan providers.
In addition to term loans, a second mortgage loan can be used as extra security by mainstream lenders, so business owners can access more credit for their business. An example of this could be securing a Trade Finance line of credit with second mortgages taken as security but with no extra charges on top of the fees associated with the line of credit.
How you can use a second mortgage in your business
A second mortgage can be used for any genuine business purpose, including:
- Working capital
- Pay out tax debt
- Debt consolidation
- Bridging finance
- Refinance existing second mortgages to extend terms
- Partner buyouts
- Business acquisitions
- Funding plant and equipment purchases
- Securing lines of credit
- Cashing out equity with a 2nd mortgage equity loan.
Second Mortgages and Bad Credit
Second mortgage lenders don’t usually check credit scores, so they’re a solution that works for business owners who may have defaults on their credit file – we’ve even had ex-bankrupts approved.
The genuine low-doc application loan process will seek to understand the equity you hold in property and if it’s sufficient to be used as security for the loan. Second mortgage loan providers will then seek to understand your strategy to exit the loan at the end of term and if this is acceptable an approval for funding can be achieved regardless of your credit history.
Interest Rates and Repayments
Given second mortgages are considered more risky than first mortgages their rates are normally higher but because they are secured against property they’re usually less than interest rates for unsecured loans.
Rates for a second mortgage are typically interest only with the option to be capitalised to the loan, which can mean no repayments for up to 12 months.
Because of the higher rates associated with second mortgages, ideally they should be utilised as a short-term strategy, and business owners should seek to refinance a second mortgage as quickly as practical. When assisting with a second mortgage loan we work with our clients up front to plan a way back to more mainstream and cost-effective lending as soon as possible.
Applying for a Second Mortgage
When applying for a second mortgage, before you seek a letter of offer it’s important to ensure you’re working with a lender who has a track record of settling the size loan you’re after against the kind of security property you’re offering for the loan. There have been circumstances where business owners have paid thousands in “due diligence” or other kinds of fees only to find the lender has no interest in funding their loan.
If you’re not sure how to assess whether a private lender is the right fit for you – independent of their sales process – we recommend you work with a specialist private lending expert. An experienced private lending finance expert will have a demonstrated history of working with a number of private second mortgage lenders and will guide you through the loan process.
Responsible Consumer Lending Laws in Australia Don’t Apply to 2nd Mortgages
Responsible lending laws in Australia require lenders to assess whether a loan is suitable for the consumers needs and financial situation. This means that lenders must take into account factors such as income, expenses, and credit history before approving a loan. Second mortgage business loans are only offered to business entities such as companies and trusts and they are not afforded the same regulatory protection as consumer loans. Loan contracts for second mortgages will specify borrowers stipulate the loan is for business purposes before funding is approved for settlement to applicants.
Get expert advice when seeking a second mortgage
Not all private lenders are created equal and second mortgage loan contracts can have significant default fees and charges for what you might consider minor indiscretions but a lender may treat as a breach of contract. Over the years we have helped a number of clients out of difficult loans that they should not have entered into in the first place, with the help from our second mortgage lenders. We strongly recommend seeking expert advice before choosing a second mortgage loan provider for your business.
A second mortgage can be a useful tool for your business if you’re looking to access funds but it’s important to understand the risks and responsibilities that come with taking out any private loan before you sign any offers or contracts.
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