What is a second mortgage?
A mortgage is security for a loan, registered against the title of a property. When a property already has one mortgage, usually a home loan with a bank, a second lender can take a second mortgage behind it. The second mortgage “ranks” behind the first.
Ranking matters if the property is ever sold under a mortgagee sale. The first lender is repaid first, and the second lender is repaid from whatever’s left. Because the second lender stands further back in the queue, it looks closely at how much equity is available, and it prices the loan accordingly.
Why business owners use second mortgages
For a business owner who needs funding, a second mortgage has some real advantages:
- Your home loan stays put. If you’re on a good fixed rate, breaking it to refinance could mean break costs and a higher rate. A second mortgage avoids that.
- Your bank doesn’t have to lend. If the bank has declined because of IRD arrears, credit history or late accounts, a second-mortgage lender may still help.
- It can be quick. Property-secured lending doesn’t need financials or tax returns for the initial assessment. In some cases funding is possible within 24 hours of approval.
- It’s flexible on purpose. Clearing IRD, paying creditors, refinancing a private lender, buying equipment or a business, funding working capital.
How equity works
Equity is the property’s value minus what’s owed against it. Lenders then apply a maximum lending ratio across all mortgages combined, leaving a buffer.
| Example | Figure |
|---|---|
| Property value (registered valuation) | $900,000 |
| Existing first mortgage | $420,000 |
| Equity | $480,000 |
| Combined lending the lender is comfortable with (illustrative) | Depends on the property, location and situation |
| Room for a second mortgage | Combined limit minus $420,000 |
Illustrative only. The acceptable combined lending ratio varies by lender, property type and location. Lenders tend to be more conservative with rural property, bare land and specialised commercial buildings.
The first lender’s position
Your existing mortgage document may say that you can’t grant another mortgage without the first lender’s consent, or that you must notify them. Some first lenders also register a “priority amount”, which sets how much of the first loan ranks ahead of any second mortgage. The new lender’s solicitor will check the title and existing documents and deal with the first lender as needed.
The costs to expect
Second mortgages usually cost more than first mortgages, reflecting their ranking. Beyond the interest, expect:
- a valuation;
- legal costs for the mortgage documents;
- lender establishment costs.
Every loan is priced on the individual circumstances. Ask for the total cost in writing, including what happens if you repay early.
The risks
A second mortgage is secured on property, so if the loan isn’t repaid, the lender can ultimately enforce, including through a mortgagee sale under the Property Law Act 2007 after the required notices. That’s the fundamental risk, and it’s the same with any mortgage.
Other things to consider:
- Two repayments on the same property, the first mortgage and the second.
- Less equity cushion if property values fall.
- Co-owners must all agree and should get independent advice.
Our guide to using home equity to save your business discusses how to weigh these honestly.
Second mortgage vs refinancing everything
| Second mortgage | Refinance first mortgage | |
|---|---|---|
| Existing home loan | Stays in place | Replaced |
| Break costs | Avoided | Possible if fixed |
| Speed | Often faster | Can be slower |
| Pricing | Reflects second ranking | Reflects first ranking |
| Best when | Existing loan is well priced; you need a specific sum | Existing loan is expensive or expiring |
Sometimes the answer is a mix: a new first mortgage on one property and a second on another.
What exits look like
Second mortgages for business are generally short-to-medium term, so a clear exit matters. The usual ones: refinancing into a single bank loan once IRD is clear and the accounts are filed, selling a property, or repaying from trading. See exit strategies for short-term loans.
Getting started
If you own property with a home loan on it and need business funding, start an enquiry. Tell us roughly what the property is worth and what’s owing, and a lending specialist will tell you what’s realistic.