Priority deeds explained: sitting behind a bank on a second mortgage
A second mortgage behind a bank sounds like simple stacking: the bank sits first, the private lender sits second, everyone registers and the project gets funded. In practice the structure turns on one document that is often left until last — the deed of priority. It decides how much the first mortgagee can claim ahead of everyone else, what the second mortgagee may do when things go wrong, and, more often than developers expect, whether the transaction settles on time.
What a deed of priority actually does
Registration order on title establishes priority between mortgages, but it does not, on its own, tell a second mortgagee how much debt sits in front of it. A first mortgage is usually drawn on “all moneys” terms, securing whatever the borrower owes the bank now or in future. Left alone, the amount ranking ahead of a second mortgagee can therefore grow — further advances, capitalised interest, line fees, default interest and enforcement costs all sit inside the same registered security.
A deed of priority is the contract that fixes this. It records an agreed order between the mortgagees and, critically, caps the amount the first mortgagee may recover in priority. It usually also sets out notice obligations, standstill provisions, consent rights over variations, and how enforcement proceeds are applied — binding the mortgagees to each other in a way the title register never does.
Who the parties are
- The first mortgagee — typically the bank or major lender already registered against the security property.
- The second mortgagee — the incoming private or non-bank lender taking the subordinated position.
- The mortgagor — the registered proprietor, often a trustee company or special purpose vehicle rather than the operating entity.
- Guarantors and related parties — often joined so the arrangement extends to guarantee obligations as well as the principal debt.
Priority amount versus loan balance
This is the distinction most developers miss. The priority amount is not the bank's current balance. It is a stated ceiling — commonly the facility limit plus a margin for interest, costs and enforcement expenses. Anything owed above that ceiling ranks equally with, or behind, the second mortgagee.
The cap matters in both directions. A second mortgagee wants it tight and clearly defined, because an open-ended priority amount means the equity it thought it was lending against can be quietly consumed. A borrower wants it wide enough that the bank need not be asked for fresh consent every time the facility is varied or redrawn. Construction facilities complicate this, because the first mortgagee's exposure is designed to grow with each progress drawdown — the deed must accommodate a rising balance without leaving the cap effectively unlimited.
Resolve before documents are drafted: does the priority amount include capitalised and default interest, and for how long? Does a redraw or further advance sit inside the cap, or require the second mortgagee's consent?
First-mortgagee consent, and why banks often refuse or delay
Most bank mortgages prohibit granting further security without written consent, and that consent is discretionary. Refusals and delays usually come from a few places: the request triggers a full credit re-assessment rather than an administrative approval; consent sits with a centralised securities team rather than the relationship manager who knows the client; policy discourages subordinated debt behind a construction exposure; or the request arrives without the evidence needed to say yes, so the easiest answer is no.
That last category is the one that can actually be moved. A default “no” is frequently a response to an incomplete request rather than a considered credit decision. In one published example, a lender's initial position on releasing cost-to-complete funds mid-build was no — $301,364 was ultimately released within 48 hours after an evidence-based escalation. That was one past transaction on its own facts, not a benchmark, but the point holds: how a request is packaged, and to whom it is escalated, changes outcomes more often than developers assume.
Jurisdictional mechanics add friction too. Western Australian practice around wet-ink execution and witnessing has caught out more than one east-coast transaction. On an interstate second mortgage behind an ANZ first, the signature requirement and the deed were pre-solved rather than discovered late.
What happens on default
The deed, not intuition, governs the sequence. The typical architecture:
- A default occurs and the deed's notice obligations are triggered — each mortgagee generally must tell the other.
- A standstill period may apply, restricting the second mortgagee from enforcing for a defined window.
- The first mortgagee normally controls possession and sale, or the appointment of a receiver or agent.
- The second mortgagee often has a right to remedy the default, or to pay out the first mortgage at the priority amount, preserving its position.
- Proceeds are applied in the agreed order: enforcement costs, the first mortgagee up to its cap, then the second mortgagee, then any surplus to the mortgagor.
Every step is contract-specific and varies between lenders. Read the deed and take your own legal advice on it — do not assume a standard form or a standard outcome.
Cross-collateralised security
Where the bank's first mortgage forms part of a cross-collateralised portfolio, the position becomes materially harder to price. An all-obligations first mortgage over several properties means the amount ranking ahead on your site can move with debt secured elsewhere in the group. Partial discharge terms then matter enormously: what the bank requires to release one title, how sale proceeds are applied across the portfolio, and whether the priority amount is stated per property or across the facility. Untangling that before documentation is cheaper than arguing under enforcement — and it is a common reason a completed asset is moved onto a standalone facility, as with the Mosman residual stock transaction.
The practical timetable impact
Bank consent is usually the longest item on the critical path and the one least within anyone's control, so it should start the day second-mortgage terms are agreed — not after valuation, and not after the first draw request. What tends to shorten it:
- A single consolidated request rather than a drip-feed of questions.
- A clearly stated priority amount, with the reasoning behind the number.
- A draft deed in the first mortgagee's own form, with any departures flagged up front.
- Signatories, capacities and execution requirements — including wet-ink and witnessing rules — identified early.
- Settlement agents on both sides briefed before documents circulate.
None of this guarantees consent, or puts a timeframe on a decision that belongs to someone else. It simply means the request is decided on its merits rather than stalled on missing information. Where a second mortgage forms part of a broader capital structure, our development finance advisory work usually begins by mapping the priority position before any lender is approached.
If you are weighing a second mortgage behind an existing bank facility, talk to us early — the priority position is far easier to structure before terms are agreed than to renegotiate later.
This article is general information about business-purpose property finance only. It is not financial, legal, credit or taxation advice, does not take account of your circumstances, and is not an offer of finance or of any terms. Case study details describe individual past transactions and are not indicative of outcomes, availability or timing on any other matter. Obtain your own advice before acting.