Understanding the difference between first and second mortgages is crucial when accessing property equity. Here's everything you need to know.
What is a First Mortgage?
A first mortgage is the primary loan secured against a property, in first position on title. If the property sells, the first mortgage is repaid first.
Characteristics:
- First in line for repayment
- Lowest risk for lender
- Best interest rates
- Highest loan amounts
- Standard for most home loans
What is a Second Mortgage?
A second mortgage is an additional loan secured against property with an existing first mortgage. It's in second position on title.
Characteristics:
- Second in line for repayment
- Higher risk for lender
- Higher interest rates
- Smaller loan amounts
- Faster than refinancing
Key Differences
| Factor | First Mortgage | Second Mortgage |
|---|---|---|
| Position | 1st on title | 2nd behind first |
| Interest Rate | 5.5-8% (banks) or 7-12% (private) | 9-18% p.a. |
| Risk to Lender | Lower | Higher |
| LVR | Up to 80-95% | Combined 75-85% |
| Loan Amount | Higher | Lower |
| Approval Time | 3-8 weeks (bank) | 1-3 weeks |
When to Use Each
Use First Mortgage When:
✅ Buying property (first loan) ✅ Refinancing (replacing existing first mortgage) ✅ Need lowest possible rate ✅ Need largest loan amount ✅ Long-term borrowing (10-30 years)
Use Second Mortgage When:
✅ Don't want to touch first mortgage (great rate) ✅ Can't refinance first mortgage (credit issues) ✅ Need quick access to equity ✅ Smaller amount needed ✅ Short-term need (plan to consolidate later)
Real Example Comparison
Scenario: Need $100,000, property worth $700,000, owing $350,000
Option A: Refinance to New First Mortgage
Process:
- Refinance $450,000 total ($350k existing + $100k new)
- Pay out existing first mortgage
- New single first mortgage
Pros: ✅ Single loan, single rate ✅ Lower rate (6.5-8% if bank approves) ✅ Longer term available ✅ Simpler structure
Cons: Lose great rate on existing mortgage Longer approval (4-8 weeks) Full refinance costs ($1,500-$3,000) May not approve if credit/income issues
Option B: Second Mortgage
Process:
- Keep existing $350,000 first mortgage @ 5.5%
- Add $100,000 second mortgage @ 12%
Pros: ✅ Keep great first mortgage rate (5.5%) ✅ Faster approval (1-3 weeks) ✅ Lower total interest if existing rate low ✅ Can get approved when refinance would decline
Cons: Higher rate on second portion (12% vs 6.5%) Two loans to manage Shorter term on second Exit fee risk if second mortgage has penalties
Cost Comparison (Year 1):
Option A - Full Refinance @ 7% p.a.: $450,000 × 7% = $31,500/year interest
Option B - Keep first @ 5.5%, second @ 12%:
- First: $350,000 × 5.5% = $19,250
- Second: $100,000 × 12% = $12,000
- Total: $31,250/year
Option B saves $250/year (plus kept low first mortgage rate)
Second Mortgage Risks
For Borrower:
- Higher interest cost
- Two loan repayments
- If can't pay, both lenders can enforce
- Combined debt may limit future borrowing
For Second Lender:
- If property sells, first mortgage paid first
- Only gets paid if equity remains
- Higher risk = higher rates charged
How Second Mortgages Work in Default
If property sold (voluntarily or foreclosure):
Example:
- Sale price: $650,000
- Sale costs: $20,000
- Net proceeds: $630,000
Payment priority:
- First mortgage: $350,000 (paid in full)
- Remaining: $280,000
- Second mortgage: $100,000 (paid in full)
- Remainder to owner: $180,000
Everyone paid.
But if sale price only $450,000:
- Net: $430,000
- First mortgage: $350,000 (paid)
- Remaining: $80,000
- Second mortgage owed: $100,000
- Second lender: Only gets $80,000 (shortfall $20,000)
This is why second mortgages charge higher rates - they carry more risk.
Can You Get a Third Mortgage?
Technically yes, but:
- Very rare in Australia
- Extremely high rates (15-25%+)
- Must be very strong equity
- Few lenders offer
- High risk for lender
Refinancing Two Mortgages into One
Common strategy:
Year 1-2: Use second mortgage
- Quick equity access
- Address short-term need
- Work on credit/income improvement
Year 2-3: Refinance both into one first mortgage
- Credit now good enough for bank
- Consolidate to single loan
- Lower rate (6-8% vs 12%)
- Save thousands
Ready to explore first or second mortgage options? Connect with mortgage lenders.