Second Mortgages: Releasing Equity Without Refinancing the Whole Loan

If you have equity in a property and a first mortgage you would rather not disturb, a second mortgage is often the cleanest way to release capital. It sits behind the existing loan on the same title, so the first mortgage stays exactly as it is — same rate, same term, no break costs, no re-application.

Malouf Capital writes second mortgages from $50,000 to $1m, to 80 per cent LVR, from 12 per cent per annum.

How the numbers work

The second mortgage is measured against total debt, not just the new money. Take a property valued at $2m with a $1.1m first mortgage. At 80 per cent total LVR, the ceiling is $1.6m, leaving roughly $500,000 of second mortgage capacity before costs. Capitalised interest and fees come out of that same headroom, so the cash in hand is a little less than the gap suggests.

When a second beats a full refinance

• Your first loan is cheap or fixed. Breaking a fixed rate to access $300,000 can cost more than the second mortgage itself.
• You need it quickly. A second mortgage does not require the first lender to re-assess the whole facility.
• The need is temporary. Six months of working capital does not justify restructuring twenty years of debt.
• Your first lender has said no to cash out. Common where the purpose is business or tax related.

What business owners use them for

The most frequent uses we see are working capital through a seasonal trough, funding a stock or equipment purchase ahead of a contract, paying out an ATO or statutory debt to stop it escalating, covering a settlement shortfall, consolidating expensive unsecured facilities into one secured position, and funding an expansion where the opportunity has a shorter fuse than a bank credit process.

The first mortgagee has a say

This is the part borrowers underestimate. Most first mortgages require the first lender to consent to a second mortgage being registered. Some consent readily, some charge a fee, some decline — in which case a caveat or a full refinance becomes the alternative. Ask us early and we will tell you what your first lender typically does, and plan around it before you commit to a settlement date.

Pricing reflects the risk position

A second mortgagee is repaid only after the first is paid in full, so the rate is higher — from 12 per cent per annum in our case. The right way to assess that is total dollars over the term you actually need. Interest of 12 per cent on $300,000 for six months is roughly $18,000 before fees. Against a contract, a stock discount or a penalty avoided, that is often a straightforward decision. Against an open-ended cash shortfall, it is not.

Documents that get it done fast

• Rates notice and title for the security property.
• A current statement for the first mortgage, showing the balance and the lender.
• A short written note on purpose and exit — where the repayment comes from and when.
• Leases, if the property is tenanted.

Exit discipline

Second mortgages are short-term instruments. The exit is normally a refinance of both loans into one facility, the sale of an asset, or the cash event the funding was raised to bridge. Set the term slightly longer than your expected exit so a two-week delay does not become a default, and check that there is no early repayment charge if you finish sooner. Ours have none.

Tell us the value, the first mortgage balance and the amount you need, and we will come back with an indicative rate, LVR and timeline.