Due diligence, documentation and recovery are specific matters to note for those lenders providing finance through the use of second mortgages. 

At Bennett & Philp, a number of our lender clients provide finance in this space and we have taken the time to collate some of our best advice to second mortgagees in a practice guide that we will issue as a series of articles in the coming month.

This guide will cover some basic information about second mortgages as well as unique things to know and traps to watch out for when lending via this type of security.

This guide is also relevant to first mortgagees in understanding the rights of second mortgagees.  Some of our more general advice will also be applicable to first mortgage securities.

Due Diligence

Due diligence in second mortgage transactions must go further than checking the balance owing on the first mortgage.  We will discuss:

  1. How to calculate serviceability;
  2. Tips and traps in reading valuations;
  3. Why you should obtain full details of the first ranking security; and
  4. The legal searches available and those you should not miss.

Mortgage vs Caveat

Different jurisdictions in Australia have different requirements for the registration of second mortgages that may affect whether a second mortgage can be registered.

We will discuss the registration requirements for second mortgages in each State and Territory and provide you with some important matters to consider such as:

  1. When the consent of the first mortgagee is required;
  2. When to use a caveat and what the risks are; and
  3. What happens if you have an unregistered mortgage.

Deeds of Priority

A deed of priority is an agreement entered into between mortgagees of the same property to define the nature of their relationship.  However, many deeds of priority that we are presented with, simply re-state the existing position at law.

We will discuss:

  1. The legal rights that already exist for second mortgagees;
  2. When a deed of priority should be used;
  3. What a deed of priority should cover; and
  4. Tips and traps about deeds of priority.

Default and Execution

Default and execution are sometimes left to be considered if and when it occurs, but it is important that lenders entering into second mortgages understand what can happen.

We will discuss:

  1. The rights of first and second mortgagees in an event of default;
  2. Things to know when communicating with the first mortgagee; and
  3. Tips and traps on effecting 'take-out' of the first mortgagee.

We hope you will enjoy our practice guide series and derive some important information to apply in your business, whether as a first mortgagee or second mortgagee.  At the end of our series, the full practice guide and its checklists will be available for download from our website.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.