Question

Some overseas borrowers are being offered the opportunity to obtain a second mortgage and purchase an Australian property, without necessarily having a deposit. For example, the second- largest insurance company in China offers loans to Chinese investors for Australian residential property. The Chinese borrowers use the second mortgage as a deposit for an off the plan apartment, with the expectation that a senior loan will later be obtained from an Australian bank to pay the final 70% when the apartment is completed.

Explain why this is a potential financial risk for all involved.

(Explain different pre-settlement conditions required by lenders, including gaining consent of prior mortgagee, if second mortgage security is being taken).

Answer 1

Second mortgage or junior - lien is a loan taken by a person being house as a collateral while there is another loan secured by the house already. Thus there is a big financial risk involved in second mortgage loans. This is because if the borrower is no longer able to pay the mortgages and the house is being sold to pay off the debt, the second mortagage loan amount is paid off second. If there is not enough funds to pay off the debt taken, the first mortgage loan lender is paid off first and then the second mortgage loan lender is paid off and the second loan lender may not get the full amount.

The interest rate charged by second mortgage loan is always higher as a result. Different pre settlement conditions are required by lenders.

• The consent of prior mortgagee is to be taken whether he agrees or not.
• Proper documentation and paper work is needed.
• Lender needs to agree for the same.