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How Does a Second Mortgage Work In Australia?

If you want to grant a loan against a second mortgage, make sure that you do your homework to confirm that the amount will be protected. In this article, we are going to talk about how a second mortgage works in Australia. Read on to find out.

Equity ‘buffer’

Before you make any advances, make sure that the property has enough “equity” to secure your interest. In other words, you need to describe yourself about the money secured against the first mortgage and the property value based on the “forced sale”.

If the “buffer” is too small, know that your mortgage may not be enough to recover your money. Typically, this can be due to default interest on the loan secured by both the first and second mortgages.

Priority agreement

You need to sign a type of priority agreement with the mortgagee, which will have the provisions given below:

The mortgage must be willing to have a second mortgage

The mortgagee should make payments against the first mortgage on a priority basis. Typically, this is a fixed amount in addition to fees, interest rate, and charges payable.

If you don’t sign a priority agreement with the mortgagee, chances are that the first mortgagee will be paid an extra amount even when the money is advanced once the loan is granted. Generally, this situation happens when money is advanced in different stages. An example of this type of loan is a construction loan.

Therefore, we suggest that you read the priority agreement. Also, if you don’t know the consent of the first mortgagee before the second mortgage, it will be considered a breach of the earlier mortgage. However, this won’t affect your rights as this matter is related to the mortgagor.

Registration

You should sign up for a second mortgage rather than depend on a caveat to be on the safe side. The thing is that a registered mortgage offers a higher level of security. If you don’t register for it, you won’t have the authority to sell or transfer the property.

Also, caveats tend to have lapsing notices, which is why you need to get a court order to maintain the caveat. Improperly drafted caveats may be marked invalid or removed.

Also, if you don’t register your mortgage, you will have no interest in the property as per the title. As a result, you may risk losing priority to someone who has a registered mortgage.

Therefore, we suggest that you go through the registration process and have your second mortgage registered. This will offer greater security and allow you to sell or transfer the property if you don’t get your money back.

Conclusion

Since a second mortgage involves a lot of risks, we suggest that you do your research to ensure there is enough equity to protect the money you have lent. Apart from this, you may want to get in touch with the first mortgagee to ensure it is secure. So, the steps you need to follow include registering your mortgage against the property and signing a priority agreement with the mortgagee. Apart from this, we suggest that you get legal advice based on your specific circumstances.

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