Second mortgage behind a line of credit or redraw: how is your equity counted?

Here is a conversation we have most weeks. An owner says, “My house is worth $1.4m and I only owe the bank $180k, so I’ve got loads of equity for a second mortgage.” Then we look at the bank statement and see the $180k is drawn against a $700k line of credit.

To a second lender, that property doesn’t carry $180k ahead of it. It carries up to $700k. The difference can halve what you’re able to borrow, and it surprises owners because the unused limit doesn’t feel like debt. This guide explains why lenders count it, and the practical ways to shrink the number.

Why do lenders count the limit instead of the balance?

A bank mortgage is usually written to secure all the money you owe that bank under the facility, now or later. It isn’t tied to a fixed dollar amount the way a simple loan document might suggest. So if you have a $700k limit and draw another $500k next month, the existing first mortgage secures that new money too.

A second mortgage ranks behind the first. On a sale, the first lender is paid everything its mortgage secures before the second lender sees a dollar. If the second lender had only counted the $180k balance and you then drew the full limit, its security could vanish. That is why the prudent figure is the most the first lender could be owed, which is usually the limit.

There is also a legal wrinkle. Landgate’s practice guide on mortgages notes that whether a later advance keeps the same priority as the original mortgage, ahead of later mortgages, is decided by the rules of equity rather than by the titles register. That kind of uncertainty is exactly what a second lender wants removed before it advances money. The tidy answer is to change the limit or put the priority in writing. Our page on how second mortgages rank covers ranking in more detail.

Which facilities count, and how?

Facility secured by the first mortgage	What a second lender usually counts
Standard principal and interest loan, no redraw	The current balance
Loan with redraw available	Balance plus redraw available, often the original loan amount
Home loan line of credit	The full limit
Business overdraft secured on the property	The full limit
Bank guarantee or lease bond linked to the mortgage	The guaranteed amount
Guarantee of someone else’s loan, secured on the property	The guaranteed loan’s limit
Offset account	Usually only the loan balance; the offset is your money, not a credit limit

The point is to find everything the first mortgage could secure. Ask your bank for a statement listing every facility linked to the property, not just the main loan.

How can you increase your usable equity?

There are three tools, and they can be combined.

1. Reduce the limit. Asking the bank to cut a line of credit or overdraft down to roughly the current balance is often the fastest fix. It lowers the bank’s exposure, so most banks agree without fuss. You lose the spare limit, but the private loan replaces it with a lump sum you can actually use.

2. Freeze or remove redraw. If the loan has a large amount available to redraw, asking the bank to freeze it has the same effect for a second lender. Some owners take the redraw out first and use it as part of the funds they need.

3. Sign a priority deed. A deed of priority is signed by both lenders and fixes the maximum amount that ranks ahead of the second mortgage. Anything above that cap ranks behind. This lets you keep a working facility at the bank while giving the second lender certainty. It takes longer because the bank’s legal team has to agree the wording.

Whichever route you choose, your bank’s cooperation is involved, so raise it at the same time as any first mortgagee consent request. If you’d like to know which route makes sense before you call the bank, ask us first.

Illustrative example

Illustrative only. The business, figures and LVRs are invented to show the method.

An Adelaide café owner wants $250k to fit out a second site. The family home is worth around $1.2m and secures a home loan line of credit with a $500k limit, of which $200k is drawn.

	Counting the balance	Counting the limit	After limit reduced to $220k
Ranks ahead of the second mortgage	$200k	$500k	$220k
Plus the new second mortgage	$250k	$250k	$250k
Total secured debt	$450k	$750k	$470k
Illustrative LVR on $1.2m	37.5%	62.5%	39%

The middle column is how a careful second lender first sees it. The owner asks the bank to reduce the limit to $220k, which leaves a small buffer for the line of credit. The bank agrees within the week, the second mortgage is assessed on the right-hand column, and the funds settle once the bank’s consent arrives. Interest is capitalised for the first 6 months, so the café has time to start trading before any repayments.

Our general limits are up to 80% of value on residential security and up to 70% on commercial, but the more cleanly the first lender’s exposure is pinned down, the more of that room is genuinely yours.

Can you get the limit back once the second mortgage is repaid?

Usually, yes, but treat it as a new request rather than a switch you flick. Once the private loan has done its job and is paid out, the second mortgage is discharged and the bank is again the only lender on the title. At that point you can ask the bank to restore or increase the line of credit, and it will assess the request on your circumstances at that time.

This is why the order of events matters. Many owners use the private loan as a bridge: the business problem gets solved, the accounts are brought up to date, and then the bank refinances the whole position, sometimes increasing its own facility to pay out the second mortgage in one step. If that is your plan, mention it when you enquire. A clear refinance exit is one of the strongest things a short-term lender can see, and our loans run on open terms, so there is no penalty for repaying early when the bank is ready.

One caution: don’t reduce a limit you are relying on for day-to-day trading without a plan for the gap. If the overdraft funds wages or suppliers every month, a priority deed that leaves part of it in place may suit the business better than a hard cut. Talk it through with your accountant before you call the bank.

What should you send with your enquiry?

To avoid a second round of questions, gather:

• the latest statement for every facility with the first lender, showing limits and balances;
• any redraw-available figure on the home loan;
• details of guarantees or bank guarantees linked to the property;
• the title search or rates notice showing who owns the property;
• a short note on what the funds are for.

With that in hand, a lender can tell you on the first call which figure it will count and what would change it. For a broader view of how much you could raise, see how much equity you can use, and if the security is your own home, our page on a second mortgage on your home for business covers the extra points to think about.

Is your equity tied up in a limit you don’t use? See if you qualify

Plenty of owners have far more usable equity than their first answer suggested. It’s just hiding behind a line of credit nobody has looked at for years. Sorting out how the bank’s limit is counted is usually a short phone call, not a refinance.

Tell us about the property through our loan check. It takes about 60 seconds, and there’s no credit check just to find out where you stand, so your credit file isn’t touched. Your enquiry comes to one direct lender rather than a crowd, and a specialist who understands priority and limits reviews it and calls you. Please enter the limit as well as the balance for each bank facility. Accurate figures mean the number we give you is one you can rely on.

See how much equity you really have →