Average pricing of second mortgages In the Australian lending market vary on who the underwriter is. Typically, an institutional second mortgage will be cheaper than those provided by family offices. Mortgage AI are specialist Second Mortgage Lenders and originators.
| Maximum Loan Size | $250,000,000 |
| Property Security with no development risk | 16 % P/A |
| Property Development second mortgage | 18 ~ 25 % P/A |
Interest can be paid monthly or capitalized into the loan balance which is repaid upon refinance or sale of the security property.
What is a second mortgage? It is a registered mortgage over a security property or properties that already hold an existing first mortgage. Their order of registration determines the priorities of these mortgages. Should default arise, the initial mortgage lender is paid back first upon property sale or refinance, then any second or later mortgage lenders. A deed of priority is required in a lot of cases, this a legal document between the lenders that governs the relationship and nature of the secured money that owed to each party. A competent law firm who is well versed in Deeds of Priority will be best placed to understand the Idiosyncrasies at law and in practise of how the deed of priority will be interpreted by a court.
A commercial second mortgage will typically lend to a higher loan to value ratio that a first mortgagee which means that a borrower has access to more equity and capital.
In some cases, there are normally transaction costs like break fees, loan set up fee’s and basically all the other soft costs that comes with a first mortgage refinance or new loan, however although the interest rate is higher on a second mortgage there are potential savings when simply adding a second mortgage and then calculating the blended interest rate cost.
Second mortgages also allow you to pledge an asset for other commercial uses and can help fund other commercial ventures. Certain private lenders may take a second mortgage behind a large bank as security and expedite funding within 48 hours. Still, care is urged; depending too much on private lenders can be dangerous and is usually avoided.
Most second mortgagees can lend up-to 80% of the value of the property, most lenders have rigorous restrictions on the Loan to Value Ratio (LVR) for second mortgages. In the case of a second mortgage used for a property development transaction they will satisfy the first mortgagee that there is sufficient money
being contributed to the deal ultimately by the borrower but provided by the second mortgagee.
Most first mortgage loan agreements have a negative pledge clause. Under such clause, a borrower agrees not to encumber the asset with further debt without the consent of the first mortgagee. This means that the lodgement of further mortgage or any caveat (without consent of the first mortgage lender) would constitute the event of default.
Generally, a first mortgagee because of the negative pledging clause will be informed and have to approve the second mortgage. They will also wish to have a deed of priority.
Second mortgages by nature contain more risk than first mortgages. For example, the second mortgage is subordinate if a borrower defaults on the first mortgage of $100,000 with one lender, then borrows $100,000 with another. The first lender is entirely repaid should the property sell for $190,000 after default, leaving just what remains for the second lender.
Most banks apply strict borrowing restrictions or may refuse to lend completely due to these complications and the secondary priority of loan disputes.
Most second mortgage lenders will look very closely at the first mortgagees loan documents to discern and model what will happen to their security if there is an event of default. For example, a second mortgage lender may as a blanket policy refuse to sit second to any other lender than a Bank. Typically, because the penalty or default interest rates are far less than that of a private and the recovery process is more predictable. Whereas a private lender will want to recover their money quickly and in some cases the interest rate in which the loan was originally written has doubled or tripled.
In many general ways when borrowers or financial practitioners talk about mezzanine finance and second mortgage, they believe it’s the same thing. This couldn’t be further from the truth, there may be in fact a difference in the priority as to which lender recovers their money first in the event of default but many critical factors exist in the transaction mechanics and the legal documents underpinning this type of intercreditor relationship.
A brief example may be that the mezzanine lender has a loan agreement but can’t registered it against the physical property. Anther example may be that the mezzanine lender is secured against the shares in the company that is the borrower which infers their security, but still no mortgage exists on the property title protecting these interests.
Mortgage AI are specialists in procuring and mixing and matching first and second mortgages whereby there is consent, co-operation and a deed of priority is agreed between the parties. It advises both borrowers and lenders alike on the commercial realities of how this works on a practical level for a specific transaction and also for transaction pools.
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