Quick answer
A first mortgage ranks first on the property title and is repaid first if the property is sold, so it is usually cheaper and can allow a higher LVR. A second mortgage ranks behind an existing first mortgage, which means more risk for the lender, a higher cost and a lower maximum combined LVR, but it lets you keep your existing loan and can be quicker than a full refinance.
Key points
- Ranking decides who is repaid first if the property is sold.
- First mortgages are usually cheaper; second mortgages are usually quicker to arrange.
- Second mortgages are assessed on combined LVR.
- Your first lender may need to consent to a second mortgage.
Checklist
- Current first mortgage terms checked
- Combined LVR calculated
- Refinance versus second mortgage cost compared
- Timing requirements clear
- First lender consent requirements known
If you want to borrow against property that already has a mortgage, there are two broad routes: replace the existing loan with a bigger first mortgage, or keep it and add a second mortgage behind it. Each has a place. The right choice depends on cost, timing, how long you need the money and how good your existing loan is.
Ranking in plain English
Mortgages registered on a title have an order. The first mortgagee is repaid first if the property is sold; the second is repaid from whatever is left. That order is what makes second mortgages riskier for lenders and therefore usually dearer.
Side by side
| Larger first mortgage (refinance) | Second mortgage | |
|---|---|---|
| Ranking | First | Behind the existing loan |
| Typical cost | Lower | Higher |
| Speed | Slower; full assessment and discharge of old loan | Often quicker |
| Existing loan | Replaced | Kept |
| Maximum LVR | Usually higher | Combined LVR usually lower |
| Consents | Not usually needed | First lender may need to consent |
| Best for | Long-term restructures | Short to medium-term needs, or keeping a good first loan |
When a refinance makes sense
- You need the money for the long term.
- You qualify for competitive first mortgage pricing.
- Your existing loan is not particularly good value.
- You have time for a full assessment and settlement.
A single loan is also simpler to manage.
When a second mortgage makes sense
- Your existing first mortgage is competitive and you want to keep it.
- The business need is short or medium term.
- Speed matters more than lowest cost.
- A full refinance is not available, perhaps because of income documentation or credit history.
Our second mortgage business loans review covers the product in detail.
Combined LVR
Second mortgages are assessed on the total of both loans against the property’s value. If combined LVR would exceed a lender’s limit, you may need to borrow less, add security or consider a different structure. The property LVR and equity calculator shows where you stand, and our LVR guide explains how limits are set.
Consents and fine print
Many first mortgages require the first lender’s consent before a second mortgage is registered. Without it, you may be in breach of your existing loan. The second lender will usually check, but read your own contract too. Also check whether default on the first loan triggers default on the second, which is common.
Cost comparison
Compare the total cost of each option over the period you need the funds:
- For a refinance: new loan costs, discharge and settlement fees, any break costs on a fixed existing loan, and the change in pricing on the whole balance.
- For a second mortgage: establishment, legal and registration costs, and the cost of the additional amount only.
A second mortgage can be cheaper overall for a short period even if its price is higher, because it does not change the pricing on your existing loan.
Caveats as an alternative
For very short-term needs, a caveat loan may be faster again, though it gives the lender a different kind of security. Our guide to caveats versus registered mortgages compares them.
Planning the exit
For a short-term second mortgage, know how it will be repaid: a sale, a refinance into a single first mortgage, or business cash flow. Many owners use a second mortgage as a bridge, then consolidate both loans once the business’s need is clearer.
An illustrative example
A made-up engineering firm needs funds for six months to complete a contract. The directors’ home loan has competitive pricing and two years left on a fixed term, with break costs if refinanced. A second mortgage for the six-month need avoids break costs and settles faster. At the end, the contract payment repays it.
How lenders view the borrower in each case
A first mortgage refinance usually involves a full assessment of income and affordability, similar to any long-term loan. A second mortgage lender may focus more on the combined LVR, the purpose and the exit, particularly for shorter terms. That difference is why some borrowers who cannot complete a full refinance can still obtain a second mortgage, and why the second mortgage often costs more. Neither approach is better in itself; they answer different questions.
Questions to ask before choosing
- What would refinancing cost in total, including break costs and fees?
- What would the second mortgage cost for the period you need the funds?
- Does your existing loan contract permit a second mortgage, and on what conditions?
- How long will the business need the money?
- What is the plan to repay or consolidate the second mortgage?
- How would a default on either loan affect the other?
Not sure which route suits?
If you are weighing a refinance against a second mortgage, make one enquiry. There is no credit check when you first enquire, a real person reviews it and your details go to one lending partner rather than a crowd. Include your existing loan balance and how long you need the funds in your enquiry.
Frequently asked questions
What does it mean for a mortgage to rank first?
If the property is sold to repay debts, the first-ranking mortgagee is repaid in full before any later-ranking mortgagee receives anything.
Why are second mortgages more expensive?
Because the second lender is repaid only after the first, it carries more risk if the property's value falls or the borrower defaults.
Do I need my existing lender's permission for a second mortgage?
Many first mortgage contracts require consent or notice before another mortgage is registered. The second lender will usually check.
Is refinancing always cheaper?
Over the long term, a single first mortgage is often cheaper. But refinancing has its own costs and delays, and may mean giving up a competitive existing loan.
Can a second mortgage become a first mortgage?
If the first mortgage is repaid, the second can move up in ranking, or the loans can be refinanced into a single first mortgage.
Can I have a second mortgage on commercial property?
Yes, some lenders offer second mortgages on commercial property, usually with conservative combined LVR limits.
What happens if I default on the first mortgage?
Default on the first loan can trigger default on the second, and the first lender's enforcement affects both. Keep both loans current.
Can I have a second mortgage with a different lender from my first?
Yes. Second mortgages are often provided by a different lender from the first. That is why consent and priority arrangements between the two lenders matter.
Sources and further reading
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