In its March 2023 Bulletin non-bank lending in Australia and the implications for financial stability, the Reserve Bank of Australia (RBA) pointed out that non-bank lending plays an important role in financing economic activity that wouldn’t otherwise be funded by banks.
But that doesn’t mean all non-bank solutions are created equal and business owners who are seeking a second mortgage should understand there is significant variation in the standards, fees and processes of different non-bank loan providers.
When seeking finance from private lenders, some business owners seem to go with whoever can give them approval first. However, there is more to finding the best second mortgage than the first approval you find.
Defining 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.
Second mortgages are offered by private lenders to business entities, either a company or a trust, meaning they do not fall under the regulations that apply to consumer lending. This means that second mortgage providers will generally not investigate the incomes of their applicants but the benefit of this is that the loan process is faster and approvals can be gained that wouldn’t be offered by major banks.
When to Use a Second Mortgage
Second mortgages are normally used to solve problems. Some of the solutions a second mortgage can be used for include:
- Working capital
- Paying out tax debt
- Debt consolidation of multiple loans
- Bridging finance
- Refinance existing second mortgages to extend terms
- Partner buyouts
- Business acquisitions
- Funding plant and equipment purchases
- Cashing out equity with a 2nd mortgage equity loan.
Key Features of the Best Second Mortgage Loan
Quick Approval and Funding
Many of these reasons are time-sensitive, so the best second mortgage loans will be approved and funded fast with an easy application process. The approval process should be an assessment of property assets as security for the loan and understanding the borrower’s exit strategy. Lenders will then typically seek to confirm the loan balance of your first mortgage and enter into a deed of priority with the first mortgage provider. A deed of priority ranks the lender’s rights over the security property and essentially gains the first mortgage provider’s consent for the second mortgage to occur.
The application process should include minimal fees. While a valuation fee and legal fees are reasonable and normal, some lenders charge additional fees that are unnecessary. We recommend to our clients they avoid second mortgage lenders who request due diligence fees on top of normal charges.
Many second mortgage loan providers only offer terms of 6 months. The best second mortgage loan available will come with a term that’s right for your needs. There are lenders who offer terms up to 3 years but just because a term is longer might not make it better for your specific situation. You can seek a flexible solution from a lender who has a history of extending terms as this kind of arrangement will mean you’re not locked into a loan longer than you need to be. We recommend seeking the shortest term you’re comfortable with, as you should be seeking to exit the second mortgage and return to cheaper loan solutions as soon as business allows.
Consider getting expert assistance to get the best second mortgage loan for your situation. A specialist second mortgage loan expert should have a number of reputable lender options on their panel and can assist you through the process to get your loan.
Your Best Second Mortgage Checklist
To ensure the best second mortgage loan, make sure you’ve considered all of these points before going ahead with your chosen second mortgage provider:
- Explore options to refinance your second mortgage and be confident of your exit strategy before you apply
- Capitalised interest, fixed rate or an ability to make lump sum repayments and lower interest – get the right interest option for you.
- Identify second mortgage lenders who have a reputation of acting fairly in the event you need to extend the term or something about your situation changes. Whilst you will still need to repay the loan you want to avoid high penalty fees and minimise any chance of default.
- Confirm your security property is acceptable before paying any valuation or due diligence fees – e.g. does your second mortgage lenders accept commercial property as well as residential property security, or do they accept property security located in regional areas or just capital city locations?
- Understand the application process and make sure you are not paying unnecessary fees to a second mortgage provider who has no intent to settle your loan.
With this guide to second mortgages for Australian business owners you should now be better equipped to find the best second mortgage loan for your Australian business and your unique circumstance. Remember to work with a specialist second mortgage loan expert to ensure your loan is tailored to your needs.
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