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A sale is the most common way second mortgages are repaid, and the mechanics are routine for any conveyancer. The points that catch sellers out are arithmetic and timing.
How settlement works
- When the contract is exchanged, the seller’s solicitor or conveyancer asks each mortgagee for a payout figure to the settlement date.
- All parties join an electronic settlement workspace.
- At settlement the buyer’s funds are disbursed in order: the first mortgagee’s payout, the second mortgagee’s payout, rates, land tax and other adjustments, the agent’s commission if paid through settlement, and the balance to the seller.
- The discharge of first mortgage, discharge of second mortgage and transfer are lodged together. The buyer takes title free of both.
Check the arithmetic before you sign
Sale price, less:
- first mortgage payout, including any break costs on a fixed rate;
- second mortgage payout, including any minimum interest and legal costs of discharge;
- agent’s commission and marketing;
- legal fees;
- land tax, rates and any GST on the sale;
- any capital gains tax that has to be funded from proceeds.
If what is left is negative, the sale cannot settle unless a lender agrees to take less, and the second mortgagee is the one who would be short. Get both payout figures before accepting an offer, not after.
Minimum terms and early repayment
Most second mortgages do not charge a penalty for early repayment as such, but many charge interest for a minimum period, often three to six months. Where interest was prepaid or capitalised for the full term, ask how much is rebated on early repayment. It is in the loan agreement, and it changes the payout figure.
If the lender is selling, not you
After default and the required notices, a registered second mortgagee has a power of sale, subject to the first mortgage and any deed of priority. In practice the first mortgagee often takes control. A sale run by the owner nearly always achieves a better price and lower costs than a mortgagee sale, which is a strong reason to act early if repayment is in doubt.
Selling part, keeping part
Where security covers several titles, selling one requires a partial discharge. Lenders agree if the remaining security still supports the remaining debt at the agreed LVR. Negotiate the release price for each title at the start of the loan if staged sales are the plan, as they are with residual stock.
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Get matched with a funderFAQ
Do I need the second mortgagee's permission to sell?
You need it to provide a discharge at settlement, which it must do once it is paid in full. You do not need permission to list the property, but tell both lenders early.
Is there a fee for repaying a second mortgage early?
It depends on the agreement. Many have a minimum interest period, so selling in month three of a twelve-month loan may still incur several months of interest.
What if the sale price does not cover both loans?
The second mortgagee would have to agree to release its mortgage for less than it is owed, which it is not obliged to do. The shortfall remains a debt, and any guarantees still apply.