PRACTICE GUIDE FOR SECOND MORTGAGES
Due diligence, documentation, and recovery, there 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 being a series of articles dedicated to the use of second mortgages.
This guide covers critical information about second mortgages as well as tips 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 in second mortgage transactions must go further than checking the balance owing on the first mortgage. Our guide considers:
- How to calculate serviceability;
- Tips and traps in reading valuations;
- Why you should obtain full details of the first ranking security; and
- The legal searches available and those you should not miss.
Mortgage versus Caveat
Different jurisdictions in Australia have different requirements for the registration of second mortgages that may affect whether a second mortgage can be registered.
Our guide considers the registration requirements for second mortgages each State and Territory and some important matters to consider such as:
- when consent of the first mortgagee is required;
- why use a caveat and what the risks are; and
- 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 see simply re-state the existing position at law.
Our guide considers:
- the legal rights that already exist for second mortgagees;
- when a deed of priority should be used; and
- what a deed of priority should cover.
Default and Execution
Default and execution is usually not considered until it occurs, but it is important that lenders entering into second mortgages understand what can happen. This can impact on the type of security chosen and how a lender might respond to concerns or late payments.
Our guide looks at:
- important things to consider when dealing with a default;
- how to correspond with another mortgagee and the effect of 'take out' rights;
- the obligations of a mortgagee when effecting power of sale; and
- how other securities such as personal guarantees and general security agreements may be useful.
We hope you enjoy our practice guide series and derive some important information to apply in your business, whether as a first mortgagee or second mortgagee.
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.