Second-ranking facilities: add capital without refinancing the bank

Why not just refinance the bank?

A full refinance is the cleanest structure on paper. In practice, established businesses often have good reasons to leave the first mortgage alone:

• the existing home or commercial loan is well priced and long-dated
• break costs on a fixed-rate facility would be significant
• the bank also provides transaction banking, merchant facilities, guarantees or equipment finance that would be disrupted
• the need is medium-term and doesn’t justify moving everything
• timing: a refinance of several facilities can take longer than the opportunity allows

A second-ranking facility unlocks equity without touching those arrangements. The bank keeps its first mortgage, the business gets the capital, and the relationship continues.

How does a second mortgage actually work?

Two lenders hold registered mortgages over the same property. The first mortgagee has priority: if the property is ever sold under default, it’s repaid first, and the second mortgagee is repaid from what remains. That ranking is why a second lender focuses heavily on the combined position.

Illustrative property position	Amount
Valuation	$2,400,000
Existing first mortgage	$1,100,000
Equity before new facility	$1,300,000
Proposed second-ranking facility	$500,000
Combined debt	$1,600,000
Combined loan-to-value	About 67%

Illustrative only. Each lender sets its own limits by property type, location, purpose and exit.

The facility itself sits within the $20,000 to $5,000,000 range for property-secured business lending and is for business purposes only.

What about the first lender’s consent?

This is the step that most often delays a second mortgage. Many first mortgages contain a clause prohibiting further encumbrances without consent. Even where they don’t, the second lender will usually want the first lender to acknowledge its interest and confirm the current balance.

Practical points:

• Read the documents early. Your mortgage and facility letter will say what’s required.
• Tell your banker the purpose. A clear, sensible reason (working capital for growth, a partner exit) is easier to consent to than an unexplained request.
• Expect questions. The bank may ask about the new facility’s terms, especially if its own covenants cover total debt.
• Check business facilities too. If the bank also lends to the company, its general security agreement or negative pledge may restrict new borrowing even if the property is personal.

If the bank’s reaction to the request is to ask for more security itself, see what to do when the bank wants more security.

When is a second-ranking facility the right answer?

It tends to suit situations where the capital need is real, the equity is there, and disturbing the bank would cost more than it saves.

• Funding a partner or shareholder exit so the remaining owners keep the operating facilities intact — see loans to buy out a business partner.
• Adding working capital when the bank has capped the overdraft.
• Funding an acquisition deposit or a gap in the purchase price.
• Paying out ATO debt in one step rather than carrying a long payment arrangement.
• Bridging to a full refinance once the next set of accounts is lodged.

Where the need is short and the exit is imminent, a caveat loan may be quicker. Where the whole debt stack needs rebuilding, a full refinance is usually more efficient.

Not sure which? A specialist can usually tell from a few details: describe the property, existing debt and purpose.

What does the lender need?

• Property details and a recent rates notice or title search
• Statement for the existing first mortgage
• Business financials or management accounts, scaled to the facility size
• Clear purpose and exit
• Identification for borrowers, guarantors and property owners

Expect a valuation to be ordered, and legal documents for the mortgage and any guarantees. Property owners who aren’t borrowers should obtain independent legal advice.

Exits: how does the second mortgage come off?

Every second-ranking facility needs a plan for how it ends. Common exits:

1. Consolidation into a single first-ranking facility once the business’s accounts support a larger bank limit.
2. Asset sale — the sale of a property, a division or surplus equipment.
3. Cash flow — amortisation from trading over the term.
4. Transaction completion — for example, the release of an earn-out or deferred payment.

A lender will test the exit as hard as the security. The more concrete the plan, the better the terms tend to be.

Questions to ask before you sign

• Does my first mortgage allow a second mortgage, and has the first lender agreed in writing?
• What is the combined loan-to-value across both mortgages after the new facility?
• What is the total cost in dollars for the term I expect to need, including fees?
• Can I repay early, and what would that cost?
• What happens if the first mortgage is refinanced while the second is in place?
• Has every property owner who isn’t a borrower received independent advice?

Could a second-ranking facility work for you?

If there’s equity behind an existing loan and a clear business purpose, a second-ranking facility can add capacity without the upheaval of a full refinance. Tell us the property, the first mortgage balance and what the funds will do.

We don’t run a credit check when you enquire, and your details go to one specialist rather than a queue of lenders. Please be precise on the form about the existing mortgage and the property owner — those two details decide the structure more than anything else. Ask about a second-ranking facility.