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Priority decides who is paid first if a property is sold. A first mortgage is paid in full, then the second, then whoever holds the next interest. A caveat behind two mortgages is third in that queue, and everything about the loan follows from that.
When it can work
Take a property worth $3,000,000 with a bank first mortgage of $1,000,000 and a private second mortgage of $400,000. Combined debt is $1,400,000, or about 47%. A further $250,000 by caveat takes it to 55%. There is still $1,350,000 of equity behind the new lender. Some lenders will do that, at a price.
Now change the first mortgage to $1,600,000. Combined debt with the second is already 67%. There is no room, and no caveat lender will add to it.
Why few lenders do it
Third position carries the most risk. If values fall or enforcement costs mount, the third-ranking lender absorbs the loss first. It also has the least control: either prior mortgagee can sell, and the caveat holder waits for whatever is left. Lenders price that, and many simply decline.
The better structure: consolidate
In most cases the practical answer is to replace the existing second mortgage. One new second mortgage for $650,000 pays out the old $400,000 and provides the new $250,000. The lender is in second position, not third, the rate is lower, and there is one facility to manage and one exit to plan. If the existing second is itself expiring, this solves two problems at once. See refinancing a private loan.
Or use other security
Equity in a different property - other premises, an investment property, a director’s asset - can support the loan on better terms than a third position. Caveats can be lodged over more than one title. See borrowing against property held in two entities.
A caution
Three layers of debt on one asset usually means the underlying issue has not been dealt with. Before adding a third, test the exit hard: what event repays all of this, and when. If the honest answer is unclear, talk to your accountant before borrowing again.
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Get matched with a funderFAQ
What LVR applies behind two mortgages?
It is assessed on the total of all three debts against value. Expect lenders to want the combined figure well inside the usual 65% ceiling, because a third-ranking position is the first to lose in a sale.
Do the existing lenders have to consent?
A caveat can generally be lodged without their consent, but both existing mortgages are likely to prohibit further security, so the breach question applies twice.
Can I use a different property instead?
Yes, and it is often the better route. A caveat over another property owned by the company, trust or a director, with fewer existing debts, will price better.