With banks tightening credit standards, private lenders are increasingly stepping into the gap and second mortgage lending has become one way for investors to earn attractive, income-focused returns from residential property, without owning bricks and mortar directly.

The Basics

A second mortgage sits behind an existing bank loan on a property’s title. As an investor, you lend money secured against the borrower’s equity above the first mortgage, typically for short-term needs like bridging finance or funding a sale. You can invest directly by selecting individual loans, or via a pooled fund spreading your capital across many mortgages to reduce single-loan exposure.

Typical Timeframe

Most facilities run 6 to 24 months, with 6–12 months common where the borrower has a confirmed exit such as a refinance or sale.

Returns (Net of Fees, Annualised)

Funds blending first and second mortgages typically deliver around 9–12% net p.a., while funds concentrated in second-mortgage or subordinated positions deliver roughly 12–18% net p.a., well above pure first-mortgage funds, which sit closer to 7–10% net p.a. Individual providers commonly quote target distributions in the 6–9% net p.a. range, paid monthly after fund costs and management fees.

Risks

Returns are not guaranteed, distributions depend on borrower repayments, portfolio performance, and how defaults are managed. If a borrower defaults, the first mortgagee is repaid in full before any funds reach the second mortgage holder, and business-purpose loans often carry fewer statutory protections than consumer credit. Fee structures, liquidity terms, and manager track record vary significantly between funds.

Second mortgage investing can suit income-focused investors comfortable with illiquidity and credit risk, but it’s not a substitute for proper due diligence and reading the PDS.