What Is a Second Mortgage and How Do They Work?

Second mortgages are on the rise in Australia, but they’re still widely misunderstood. Whether you're a homeowner needing fast equity access or a developer seeking short-term capital, second mortgages can help unlock value from your property. Private lending across Australia has grown significantly in 2025, with second mortgage products becoming increasingly popular in both consumer and non-consumer scenarios. The appeal is clear: borrowers can access funds without disturbing their existing first mortgage.

Second mortgages also come with risks, specific lending criteria, and different rules depending on the type of borrower. So, how do second mortgages actually work in Australia? And when do they make sense?

What Is a Second Mortgage?

A second mortgage is a loan secured against a property that already has a primary mortgage. The second lender registers their interest on the property title behind the first lender. If the property is sold or repossessed, the first mortgage is paid off first. The second lender is only paid from the remaining funds. Second mortgage lenders take on more risk, these loans typically attract higher interest rates, shorter loan terms, and more scrutiny around the loan-to-value ratio (LVR) and repayment strategy.

Who Uses Second Mortgages in Australia?

There are two main types of borrowers:

• Consumers: Individuals using the funds for personal purposes, such as renovations or debt consolidation. These loans are regulated loans.

• Non-consumers: Borrowers using the funds for business or investment purposes. These loans are not regulated under consumer credit laws.

Each group is treated differently by lenders, especially when it comes to LVR and the assessment process.

Second Mortgages for Consumers

In consumer lending, second mortgages are often used to:

• Fund renovations

• Consolidate debts

• Pay for unexpected personal expenses

• Bridge the gap between buying and selling a property

These loans are regulated under the National Consumer Credit Protection Act (NCCP), so lenders must follow strict responsible lending obligations. That includes verifying income, liabilities, and ensuring the borrower has a clear repayment plan.

Exit Strategy Is Essential

A private lender will only approve a consumer second mortgage if the borrower has a realistic and clearly defined plan to repay the loan.

Typical exit strategies include:

• Selling the property

• Refinancing with a bank after improving financial circumstances

• Receiving a lump sum from an inheritance or business payout

Consumer Second Mortgage

Sarah’s Renovation Project

Sarah owns a house in Sydney’s Eastern Suburbs valued at $4 million, with an existing mortgage of $650,000. She needs $400,000 to fund a renovation project before selling the home.

Rather than refinancing her current mortgage, she applies for a second mortgage. A private lender assesses her situation and approves a 12-month loan at 12 percent interest. Her exit strategy is to sell the renovated property and repay both the first and second mortgages.

After completing the upgrades, Sarah sells the home for $5.5 million, repays both loans, and retains the remaining profit.

Second Mortgages for Non-Consumers

Non-consumer second mortgages are typically used in commercial or investment scenarios. These include:

• Property development

• Business cash flow needs

• Bridging finance between projects

• Refinancing or releasing equity for other commercial opportunities

These loans fall outside of NCCP regulation, lenders can approve them more quickly and offer more flexibility. However, they are also more conservative when it comes to LVR.

LVR Is Capped at 75 Percent

Most private lenders will only approve second mortgages if the combined debt (first and second mortgage together) does not exceed 75 percent of the property’s current market value.

For example: if your property is worth $1 million and you already owe $600,000 on the first mortgage, the maximum second mortgage you could get is $150,000. That brings the total debt to $750,000, which is 75 percent of the property’s value. It is important to remember that the $150,000 top up include fees and interest rates so you would be more likely looking at $120,000 net. In some rare cases, lenders may stretch to 80 percent LVR, but 75 percent is the standard upper limit in commercial lending.

What Else Do Lenders Consider?

In addition to the exit strategy, commercial lenders assess:

• The value and location of the asset

• The borrower’s experience and credit history

• The purpose of the loan

• The feasibility of the project

• The timeframe for repayment

They are looking at the overall strength of the deal, not just how the loan will be repaid.

Non-Consumer Second Mortgage

Developer Bridging Loan

A property developer in Brisbane owns a site worth $2 million, with an existing $1.2 million mortgage. He needs $300,000 to finalise development application (DA) approvals and cover council contributions.

He applies for a second mortgage. The total borrowing would be $1.5 million, which is exactly 75 percent of the property's value.

The lender is satisfied with the project’s progress, the developer’s track record, and the exit strategy, which is to refinance into a construction facility once the DA is approved. The loan is approved with a 6-month term at 14 percent interest.

Why Choose a Second Mortgage?

Second mortgages offer a fast and flexible way to unlock equity without disturbing your current home or commercial loan.

Benefits:

• Quick access to capital

• No need to refinance your existing mortgage

• Suitable for borrowers with complex financial situations

• Can be used for many purposes, both personal and business-related

Risks:

• Higher interest rates due to increased lender risk

• Shorter loan terms, often between 6 and 24 months

• Potential risk to the property if the exit strategy fails

• Additional fees and legal costs

Second mortgages can be an excellent short-term funding solution, but they are not a one-size-fits-all product. Careful planning and expert advice are essential.

Final Thoughts

Second mortgages can provide a strategic advantage for both individuals and businesses when used correctly.

For consumers, lenders focus heavily on the exit strategy and regulatory compliance. For non-consumers, the focus shifts to asset quality, borrower strength, and staying within a 75 percent total LVR. Understanding the differences between consumer and non-consumer lending is key to structuring a deal that works.

At Innovate Funding, we specialise in helping borrowers navigate second mortgage finance, whether you're renovating your home or funding your next commercial opportunity.