Second Mortgage Lending
A not uncommon request we receive is can we arrange second mortgage finance. The borrower often is a developer of a property project looking for “mezzanine” finance. Typically the borrower has a gap that he needs to bridge between the funds available from first mortgagee and the equity or capital contribution by the Borrower. Mezzanine finance is second tier lending. In terms of priority the mezzanine lender stands behind the first secured mortgage and before the equity partner(s). Because of the higher risk involved for the mezz lender the interest rates are a lot higher.
This is specialist lending and not for mums and dads. See
Westpoint.
Second mortgage lending for development projects is the most common. If you are chasing high returns, typically 15-30% my advice is DON’T DO IT. Leave it to the professionals. I have seen enough war stories with projects that don’t happen, that take too long, that turn pear shape that just wipes out the project partners capital but also leaves the mezz lender with a serious loss of their capital as well. When you just want to be repaid and are looking to the exit doors, they are shut locked and bolted.
What about second mortgage lending for borrowers who aren’t developers? This is a different proposition, due diligence is paramount and having satisfactory security is the goal. Often I hear, can you draw up a loan agreement and lodge a caveat. No, No & No.
Risk is one thing, losing your capital is another. Here’s a list of pre-conditions.
- Valuation of the Security
- Obtain financials of the Borrower and in particular their secured borrowings. Are there any unremedied defaults?
- Preparation of Loan Agreement
- Execution of Mortgage
- Deed of Priority with First Mortgagee
- Registration of Second Mortgage
Don’t settle for registration of a Caveat. Caveats aren’t security. What you have is an unregistered equitable interest as mortgagee. Caveats don’t give you the power of sale over the security. That’s what a registered mortgage does. The valuation is important and so is getting the Deed of Priority as you will discover the truth of the current secured borrowings and the existence of any defaults.
As for lending to developers, there are a whole set of other rules.
Just Listed - Mud Brick Beauty in Healesville
A client of Hayton Kosky is selling her mud brick home in Healesville having traded the lifestyle that comes with the Yarra Ranges and switched to Sydney. Actually the switch happened many years ago, with Jo chasing her heart.
I live in the Bayside area and you dont get much luxury for $500K or even $1M. But boy you get a lot of luxury when you buy in Healesville. The asking price is $275,000 and this house is solid mud brick with absolute views of the Hills and not far from Healesville Central. No agents.
A full description is on the domain website. Click here. If you want an inspection ring Liz on 0408 585 142.
Improvident Loans to Children
Buying the first home by one of your children has probably never been harder. A low interest regime is probably the root cause as it has pushed up the capital values of property. There are a raft of other reasons and the cost of building is a large factor as well.
To enter the property market a large deposit is a good start. Securing the loan is not so hard, but the the long term committment to making the repayments is - and that usually takes the best part of two incomes to keep the whole life / debt balance in check.
It is not uncommon to see parents giving their child and their son or daughter-in-law a helping hand by making an advance which forms part of the equity in the new home.
In the heading I use the term "Improvident". A dictionary definition of the word Improvident is -
Not provident; wanting foresight or forethought; not foreseeing or providing for the future; negligent; thoughtless; as, an improvident man.Is or was the advance an outright gift, a loan or even equity?
All too often the helping hand of the parent is later judged without the benefit of any documentation as a result of the break up of the relationship of their child's marriage or relationship.
A little bit of foresight or forethought would have saved a lot of un-needed anquish in seeing their helping advance as suddenly being the catalyst for you being part of your child's family law court proceedings.
If the advance was a Loan - document it as Secured Loan with the full standing and status as a second mortgagee. No ifs buts or maybes. That's where Lawyers are really useful.
Powers of Attorney
Ask yourself - do you completely trust the person you have just given an unlimited power of attorney? This person now has the key, your complete authority, to operate on your bank accounts, sell shares, sell the house. Basically do anything.
I dont know the statistics, but the documented abuse of the ubiquitous power of attorney would be far exceeded by the undocumented abuse.
Of course we trust our partner, our children, our trusted friends and advisors. The EPOA is often drawn up and put into the bottom draw because one day we will all probably end up where we can no longer manage our affairs. However caution always needs to be exercised and a couple of things worth considering.
One. Make use of the limited or specific POA - for example, limit it to selling my house as I am overseas.
Two. Appoint not one attorney but two attorneys as joint attorneys where both attorneys must sign. for example, a son and a daughter.
Wills Trusts and the Husband & Wife Will
The typical husband & wife will is I leave everything to my spouse and on the death of both of us to the children in equal shares. The presumption is that all children are created equal and everything will be split equally. This may be true for the majority. But life doesn't always deal an even hand. There just seems to be many exceptions to the rule. Our role in drafting Wills is all options need to be explored and some that you may not have considered.
My opinion is that wherever possible things need to be kept as simple as possible when drafting, avoid ambiquity and complex language.
I recently prepared wills for a couple whose two children were both adopted. One son however had become completely wayward and little chance that he would reform. The problem with giving this son an outright inheritance is it would not help his life. The question was how to best provide for him. The first consideration was providing him with the basic requirement of suitable accomodation and the second was some form of maintenance. In this case two (testamentary) trusts were established, the first was a sum of money given to the Trustee who could either purchase a flat or invest the funds and pay for the son's rent. The second trust fund that would be created was to provide a fixed monthly distribution (as opposed to the common discretionary trusts that are often used). The balance of the estate would be left to the other adopted child.
The hardest wills to draft are the blessed mixed or blended families. They require a lot more thought.
Here I turn to the "Feynman Problem Solving Algorithm" -
1. write down the problem;
2. think very hard;
3. write down the answer.
A Word about Wills
We have heard from Warren Buffett declaring "I am not an enthusiast of dynastic wealth". Buffett in effect is devolving his wealth being the shares he owns in Berkshire Hathaway to the Gates Charitable Foundation during his lifetime. Perhaps on his death he will have nothing to will having given away all he owns during his lifetime.
For you and I making a Will is about the devolution of the assets you own at your death. Assets that do not count are jointly owned property such as family home that is held in joint names with your surviving spouse. Ditto for jointly owned bank accounts. Superannuation assets often do not count. Nor does non-vested interests in Family Trusts.
All the above however does need to be brought into account when drafting a Will.
