How Does a Second Mortgage Work for Australian Businesses?

As a business owner, you may need to secure a loan for many different reasons. As credit tightens or if traditional lending is no longer an option due to tax debt or a bad credit rating, a second mortgage which falls under the short term property loan category is a valuable option available to business owners. But, what exactly is a 2^nd mortgage and how do they work? In this article, we’ll explain the key points of a second mortgage, the loan application process and why you should work with a specialist second mortgage expert.

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What is a Second Mortgage?

A second mortgage is a type of security for a loan when there is already another loan secured by the same property. The pre-existing loan is referred to as a first mortgage.  From a security point of view the first mortgage provider has priority and, in the event of default, the loan secured by the second mortgage will be repaid after the first mortgage has been paid back in full.

In general, the term second mortgage is a catch all used to describe the loan as well as the security.  

The loan proceeds from a second mortgage can be used for any legitimate business purpose.  Some examples include:

• Working capital
• Paying out tax debt
• Debt consolidation
• Bridging finance
• Refinance existing second mortgages
• Partner buyouts
• Business acquisitions
• Funding plant and equipment
• Cashing out equity

The maximum second mortgage loan size from 2^nd mortgage loan providers on our lending panel is $50M.

Loan Terms and features

Second mortgages fall into the category of short term property loans and usually range in length from 3 months to three years. 

Second mortgages can have fixed rates and interest-only repayments. As well as this, private lenders may also allow borrowers to capitalize their interest repayments for up to 12 months.  This means no repayments are required during the loan term, and interest is paid out when you exit the loan and pay the loan out.  

Second Mortgages with Bad Credit

For those with bad credit, a second mortgage may be an option to secure business financing.  darkhorsefinancial.com.au has secured second mortgages for ex-bankrupts, those with defaults and court actions on their credit file and those who could not access traditional business funding to support their business. 

Second Mortgage Application Process

The second mortgage application process is less rigorous than applying for a traditional loan and much faster. Borrowers need to provide proof of ownership of the property and its value.  Letters of offer can be obtained within a few hours based on an applicant’s asset and liability statement and a sound exit strategy for the loan.  The letter of offer will be subject to confirming the value of the first mortgage and equity in the property and a valuation over the property.  These processes are normally run at the same time loan documents are prepared meaning the time from application to settlement can be as fast as a few days and not the weeks or months major banks sometimes take.

Second Mortgage Providers

When it comes to finding a second mortgage provider, there are numerous private lenders available. These lenders are typically more flexible than traditional banks and may be more willing to provide loans to those with bad credit. However, it’s important to research the lender’s reputation and check their interest rates and terms before signing any agreements.  You need to understand the lender you’re dealing with has a track record of settling the size loan you’re seeking against the type of security property you can offer.  Additionally, you should be confident the lender you’re dealing with has a reputation for acting fairly with their loan customers.

In the event you are not absolutely certain you have the knowledge to establish you’re working with a reputable private lender, we strongly recommend you seek the guidance of an experienced second mortgage loan expert.

Second Mortgage Rates

The interest rates on second mortgages can vary depending on the lender, the loan to value ratio of your loan, the speed you wish to settle your loan and the amount you wish to borrow.  Lenders we recommend typically have the lowest rates on offer but it’s important to realise that second mortgage interest rates will be higher than first mortgages because the loans are considered more risky. 

Getting Approved for a Second Mortgage

To get approved for a second mortgage, borrowers must meet their lender’s policy criteria.  Most second mortgage lending policy requires the loan to value ratio be below 70% and the borrower to have an acceptable exit strategy so there is a low chance of default at the end of the loan term.

Many lenders prefer residential property located in capital cities as security.   If you’re using a commercial property or a property outside of a capital city as security it’s important to make sure your lender accepts the type of security you have on offer before you apply for your loan.

Work with a second mortgage loan expert

In summary, a second mortgage is a viable option for those with bad credit who need business financing quickly. Second mortgages can have fixed rates and interest-only repayments, and private lenders may allow borrowers to capitalize interest repayments for up to 12 months. But, it’s essential to research a lender’s reputation, compare interest rates, and ensure that you can exit the loan before committing to a second mortgage.

darkhorsefinancial.com.au are second mortgage loan experts with a large panel of lenders and strong relationships that result in the best possible outcomes for clients.  To talk to an expert about your second mortgage contact us here.