Second Mortgages in Australia and the Tacking Rule

Written by: Ariana Wu

Introduction

As property values increase and financing strategies diversify, second mortgages are becoming an increasingly common financial instrument in Australia. While they can unlock additional equity for borrowers, second mortgages raise critical legal and risk considerations—particularly concerning priority between lenders.

One of the most crucial doctrines governing priority is the tacking rule, which determines whether further advances made by a first mortgagee can retain their priority over a second mortgagee’s interest. This article explores the operation of second mortgages in Australia and examines the legal nuances of the tacking rule under both real and personal property law.

What is a Second Mortgage?

A second mortgage is a subordinate form of security taken over a property already subject to a first mortgage. In the event of default or sale, the first mortgagee has priority in repayment, and the second mortgagee is repaid only after the first mortgage debt has been fully discharged.

Common Uses of Second Mortgages

Second mortgages are commonly used to access equity for the following purposes, such as property renovations, business or personal investments, debt consolidation, bridging finance or supporting cash flow. They are particularly useful where the first mortgage cannot be refinanced or amended.

Legal Structure and Registration

In practice, some second lender may choose to register a caveat over the title, which does not require the consent from first mortgage, or instead, register a second mortgage for enforceability. In most Australian jurisdictions, consent from the first mortgagee is no longer legally required for registration of a second mortgage. In Victoria, however, to register the second mortgage, the incoming second mortgagee must obtain title nomination via the PEXA workspace from the CT controller, being the first mortgagee. A Deed of Priority is often requested by the first mortgagee before title nomination is completed.

Priority of Mortgages and the Tacking Rule

Under general principles of real property law, mortgage priority is determined by the order of registration—commonly described as ‘first in time, first in right.’ However, this priority may be modified by the tacking rule, which allows certain further advances made by the first mortgagee to ‘tack on’ to the original mortgage and thereby maintain their priority over later-registered interests, such as second mortgages, subject to conditions like absence of notice or the existence of an obligatory further advance.

Tacking refers to the legal ability of a mortgagee to add subsequent advances to the principal secured by the original mortgage and maintain priority over intervening security interests, provided those advances are made without notice or are obligatory[1]. An example is as follows:

• A advances a loan secured by a first mortgage.
• B later registers a second mortgage.
• A subsequently advances further funds to the borrower.
• Under certain conditions, A may “tack” the further advance onto the original mortgage and retain priority over B.

The Rule Against Tacking in Real Property

The traditional common law rule, derived from Hopkinson v Rolt (1861), holds that further advances made after notice (actual or constructive) of a second mortgage do not retain priority, unless specific exceptions apply.

In Swanston Mortgage Pty Ltd v Trepan Investments Pty Ltd [2012] FCA 1088, the Federal Court confirmed and clarified the modern application of the tacking rule in Australia. The Court held the following:

Where a first mortgage secures further advances, those advances will only retain priority over a second mortgage if made without notice of the second mortgage, or if the further advances are obligatory under the mortgage instrument.[2]

Key principles have been clarified by the court on the application and limitation of the rule being as follows:

• Further advances before notice of the second mortgage will retain priority.
• In the event that a Deed of Priority is not entered between the first Lender and second Lender, the further advance provided by the First Lender after notice given by the Second Lender may lose priority.

The intended purpose and use of the further advance is also relevant. The recognised exception to this rule, including where the advances are made under a “building mortgage” for the purpose of improving the secured property, affirmed in Matzner v Clyde Securities Ltd [1975] 2 NSWLR 293, where the Court held that instalment payment or further advances under a building mortgage can retain priority over subsequent mortgages on the basis of fairness and to avoid diminishing the value of security available to later mortgagees.

Second Mortgagee Risk Management

A second mortgagee is at risk of ongoing/further subordination if notice of the interest is not be provided to the first mortgagee, while the first mortgagee makes further advances that are either obligatory or tacked with priority. Proactive legal and commercial steps may reduce the risk being further subordinated when first mortgagee makes further advances, such as;

• Confirm with the first mortgagee if its mortgage is a fixed-sum or all monies facility.
• Enter a Deed of Priority with the first mortgagee to clearly define the maximum secured amount for the first mortgage, establish how the priority is capped.
• Issue a tacking letter promptly to the first mortgagee immediately upon registration of the second mortgage.
• And in respect of personal property specifically:
  • Register a security interest over PPSR in the correct class and timing.
  • Be aware if any PMSIs may override the interest if it has been properly perfected.

Section 18 of the Personal Property Securities Act (PPSA)

The Personal Property Securities Act 2009 (Cth) (PPSA) allows a security interest to secure future advances, even if those advances were not specifically contemplated at the time of registration. Accordingly, the PPSA generally permits the tacking of future advances, including in circumstances where the secured party has notice of competing interests. Purchase Money Security Interests (PMSIs) gives a subsequent lender first ranking priority over specific assets where the funds advanced are used to acquire those very assets. If a lender provides credit or finance to enable a debtor to acquire specific personal property such as a vehicle, inventory, or equipment, taking a security interest in that asset, the interest qualifies as a PMSI. Once it has been properly perfected, the PMSI will take priority over other security interests in the same collateral, regardless of when those earlier interests were registered. Another exception is if a Deed of Priority has been entered, registration of AllPAP may be amended as AllPAP with exception.

Conclusion: Protecting Priority in Secured Lending

In Australia’s increasingly sophisticated lending environment, protecting the priority of mortgage security interests, particularly for second mortgagees, is both legally complex and commercially vital. Lenders must navigate the distinct regimes which can significantly impact the enforceability and priority of further advances. To mitigate the risks of subordination and unenforceability, second mortgagees should undertake due diligence, including the review of existing securities and their terms, especially any clauses permitting further advances or revolving facilities, providing prompt and formal tacking notice to the first mortgagee, negotiating Deeds of Priority, and ensuring accurate and timely registration of security interests are all essential strategies. Importantly, because the legal and practical risks can vary significantly depending on the structure of the loan, the nature of the security, and the timing of advances, professional legal advice should always be obtained before entering into or relying on any second-ranking security interest.

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[1] The Law of Security and Title-Based Financing (4th Edition)

[2] Swanston Mortgage Pty Ltd v Trepan Investments Pty Ltd [2012] FCA 1088 at [55]–[57]