How to Arrange a Second Mortgage for Small Business

Second mortgages are a common funding solution for Australian small businesses that need access to capital but want to keep an existing first mortgage in place.

This guide explains how to arrange a second mortgage for small business, including how lenders assess risk, what security is required, how loan structures work, and when this type of funding may or may not be appropriate. This article is educational only and does not provide financial advice. If you are new to private lending concepts, start with our overview of private lending in Australia.

What Is a Second Mortgage in a Business Context

A second mortgage is a loan secured against a property that already has an existing first mortgage.

The second mortgage lender registers their interest behind the first lender on the property title. If the property is sold, the first mortgage is repaid first, followed by the second mortgage.

For small businesses, second mortgages are commonly used to access equity without refinancing the existing loan.

Why Small Businesses Use Second Mortgages

Understanding how to arrange a second mortgage for small business starts with understanding why this structure is used.

Common reasons include:

• raising working capital

• funding business expansion

• covering short term cash flow gaps

• purchasing equipment or stock

• refinancing urgent liabilities

Second mortgages can be faster and more flexible than refinancing a first mortgage, particularly when timing is critical.

How Lenders Assess Second Mortgage Applications

Second mortgage lenders assess risk differently from banks.

Property Security and Equity

The key factor is available equity in the property after the first mortgage.

Lenders assess:

• current property value

• existing first mortgage balance

• total loan to value ratio

Lower combined LVRs generally improve approval outcomes.

You can learn more about this in our guide to loan to value ratios in private lending.

Exit Strategy Is Critical

An exit strategy explains how the second mortgage will be repaid.

Common exit strategies include:

• refinancing into a first mortgage

• sale of the secured property

• business cash flow improvement

• asset sale

A clear and realistic exit strategy is essential when arranging a second mortgage for small business.

Step by Step: How to Arrange a Second Mortgage for Small Business

Step One: Confirm Available Equity

The first step is confirming whether sufficient equity exists to support a second mortgage.

This usually involves:

• a property valuation

• confirmation of the first mortgage balance

• calculation of the combined LVR

Without adequate equity, a second mortgage may not be viable.

Step Two: Clarify the Business Purpose

Second mortgage lenders require a clear business purpose.

This may include:

• business growth

• short term funding needs

• refinancing existing business debt

Clear purpose helps lenders assess risk and suitability.

Step Three: Prepare Supporting Information

While private lenders are flexible, they still require key information, including:

• property details

• existing loan statements

• business overview

• proposed exit strategy

Preparation helps avoid delays.

Step Four: Understand Loan Structure and Terms

Second mortgages are usually:

• short to medium term

• interest only or capitalised

• priced higher than first mortgages

This reflects the increased risk of a second ranking position.

For a broader explanation of this structure, see our page on second mortgage loans.

Step Five: Legal Documentation and Settlement

Second mortgage loans require:

• formal loan documentation

• independent legal advice

• registration on title

Once documents are complete, funds are released at settlement.

How Second Mortgages Differ From Refinancing

Refinancing replaces the existing first mortgage with a new loan. A second mortgage leaves the first loan in place.

Second mortgages are often used when:

• the first mortgage has a favourable rate

• refinancing penalties are high

• timeframes are tight

• the lender will not consent to refinancing

This flexibility makes second mortgages attractive for certain business scenarios.

Costs and Risks to Consider

Second mortgages typically involve:

• higher interest rates

• establishment and legal fees

• shorter loan terms

Risks include:

• reliance on a clear exit strategy

• higher cost if held long term

• exposure if property values fall

Understanding these factors is important when learning how to arrange a second mortgage for small business.

Regulatory Considerations in Australia

Most second mortgages used for small business purposes are structured as business purpose loans.

This means:

• they may be exempt from consumer credit legislation

• borrowers are required to obtain legal advice

• loan terms must be clearly understood

Always confirm the regulatory position before proceeding.

When a Second Mortgage May Not Be Appropriate

Second mortgages may not be suitable where:

• there is insufficient equity

• no credible exit strategy exists

• the funding need is long term

• business cash flow cannot support interest

In these cases, alternative funding options may be more appropriate.

Frequently Asked Questions About How to Arrange a Second Mortgage for Small Business

How to arrange a second mortgage for small business if a bank says no?

Private lenders focus on property equity and exit strategy rather than traditional serviceability.

Can a second mortgage be used for working capital?

Yes, provided the loan purpose is clearly business related.

Is property always required as security?

Most second mortgages are secured by property.

Are second mortgages legal in Australia

Yes. They operate within Australian lending and property law.