Quick answer
Yes, a second mortgage can be possible with bad credit, past defaults or ATO debt. These are considered case by case, because a private secured lender focuses on the equity in the property and a clear exit more than on the credit file. Clearing an ATO debt quickly can also stop it escalating into credit reporting or director penalty problems.
Key points
- Bad credit, ATO debt and past defaults are considered case by case
- Equity in the property and a clear exit matter most
- Large overdue ATO debts can be reported to credit reporting bureaus
- Directors can become personally liable for some unpaid company tax
- Interest can be prepaid or capitalised to protect cash flow
- Amounts
- $20k – $5m
- Credit history
- Considered case by case
- Repayments
- Interest can be prepaid or capitalised
- Enquiry
- No credit check when you first enquire
Banks tend to read a credit file from the top down: one default, one overdue tax account, and the answer is no. A private secured lender reads the whole situation. If there’s solid equity in a property and a believable plan to repay, a rough patch in the past doesn’t have to decide your future.
Can you get a second mortgage with bad credit or ATO debt?
Often, yes. Bad credit, ATO debt and past defaults are considered case by case. The questions that carry the most weight are practical ones:
- Is there enough equity in the property after the first mortgage?
- Is there a clear exit, such as a sale, a refinance or a known payment?
- Does the loan fix the problem, rather than just delaying it?
A second mortgage leaves your existing bank loan in place, which matters when credit is damaged. You may not get a new bank loan today, but you may well keep the one you have. Our second mortgage business loans page covers how the product works in general.
Why does an ATO debt get harder to manage the longer it sits?
ATO debt has a habit of escalating. Three current rules explain why acting early is worth it.
1. Credit reporting. The ATO can report a business’s tax debt to credit reporting bureaus when all of these apply:
- the business has an ABN and isn’t an excluded entity;
- $100,000 or more of tax debt has been overdue for over 90 days;
- the business isn’t effectively engaging with the ATO;
- there’s no active Tax Ombudsman complaint about the intended reporting.
The ATO sends written notice first and allows 28 days to act. Complying with a payment plan counts as engaging, as does an active objection or review.
2. Director penalties. A company’s unpaid GST, PAYG withholding and super guarantee charge can become a personal liability for its directors. Once a director penalty notice is issued, there are 21 days to act. Where PAYG withholding or GST was reported more than three months late, or not reported at all, the only way to have the penalty remitted is full payment of the company’s liability.
3. The cost of carrying it. Debts on an ATO payment plan continue to accrue general interest charge, which compounds daily. And the ATO has confirmed that general interest charge incurred on or after 1 July 2025 can no longer be claimed as a tax deduction.
| ATO issue | Why it matters to your business |
|---|---|
| $100,000+ overdue for 90+ days, not engaging | Can be reported to credit reporting bureaus |
| Director penalty notice | 21 days to act, and personal liability for directors |
| Late or unreported PAYG withholding or GST | Penalty only removed by paying in full |
| Debt on a payment plan | Interest charge keeps compounding daily |
| Interest charge from 1 July 2025 | No longer tax deductible |
How does a private lender assess bad credit?
The aim is to understand what happened, whether it’s behind you and how this loan gets repaid. Expect a specialist to ask about:
- What caused the issue, such as a lost contract, a bad debtor, illness or a partner leaving.
- Whether it’s resolved, for example defaults paid or tax lodgements up to date.
- The current position, including whether the bank loan on the property is up to date.
- The exit, and evidence that it’s realistic.
Honesty here does more than anything else. A clear account, given upfront, is much easier to work with than a problem discovered halfway through. No credit check is run when you first enquire, so you can explain your situation before anything goes on your file.
How can a second mortgage clear an ATO debt?
The usual pattern is simple. The second mortgage provides the funds, the ATO debt is paid, and the business gets breathing room to rebuild. Interest can be prepaid or capitalised, so there may be no monthly repayments during the term, which keeps cash flow free for wages, suppliers and current tax obligations.
Read more on prepaid or capitalised interest. If the ATO deadline is close, our page on getting a fast second mortgage explains what you can prepare to speed things up.
Illustrative example: an Adelaide hospitality business owes the ATO $180k, has received a director penalty notice and has a bank loan in good order on the owners’ investment property. Illustrative: the property is assessed at $1m with $500k owing to the bank. If total lending on the property were capped at 70% LVR, total debt could reach $700k, leaving room for a $200k second mortgage. The ATO is paid in full, interest is capitalised, and the loan is repaid twelve months later when the owners refinance with the bank, now that their tax affairs are clean.
What exit works when your credit has been damaged?
Every loan needs a clear exit, and with bad credit the exit carries extra weight. The strongest exits usually look like this:
- Refinance to a bank once the ATO debt is cleared and lodgements are up to date.
- Sale of a property, either the security or another asset.
- Business cash flow from contracted work, seasonal trade or a large debtor paying.
- Settlement of a sale that’s already under contract.
Our guide to the exit strategy for a short-term mortgage shows how to build one a lender will believe, and private lender vs bank explains why the two read your file so differently. When you’re ready, you can share your situation with a specialist and get a straight read on it.
How is a second mortgage priced with bad credit?
A second mortgage generally costs more than a first mortgage, because the lender ranks behind the bank and carries more risk. Credit history is one input, but pricing is set on each deal’s security, LVR, term and exit, and we aim for the sharpest price your situation allows. A small assessment fee applies, varies per loan and is shown on the Letter of Offer.
Credit not perfect? See if you qualify anyway
The first step costs nothing and doesn’t touch your credit file. Tell us about the property, what’s owed on it, the ATO position or credit issue, and how you plan to repay. A real specialist reads it personally, and your details stay with us rather than being sent to a queue of lenders.
Our lending partner fundU lends directly, so the people judging your situation are the people funding it. Give us accurate answers about the property and what’s owing, including the uncomfortable parts, and you’ll get the right answer first time.
See if you qualify despite past credit issues in about 60 seconds.
Frequently asked questions
Will you lend if I have defaults on my credit file?
Defaults are considered case by case. What matters most is the equity in the property and how the loan will be repaid. Tell us about the defaults upfront, including what caused them and whether they've been paid, so the assessment reflects the real story.
Can I use a second mortgage to pay off the ATO?
Yes, paying a tax debt is a common business purpose for a second mortgage. Clearing the debt can stop general interest charge building up and can remove the risk of the debt being reported to credit reporting bureaus.
Does the ATO report business tax debts to credit agencies?
It can. Under the ATO's current criteria, a business with an ABN may be reported if it has at least $100,000 of tax debt overdue by more than 90 days and isn't effectively engaging with the ATO. The ATO sends written notice first and allows 28 days to act.
Is the ATO's interest charge still tax deductible?
Not for new charges. The ATO says general interest charge incurred on or after 1 July 2025 can no longer be claimed as a tax deduction. That makes a lingering ATO debt more expensive than it used to be.
Will enquiring hurt my credit score further?
No credit check is run when you first enquire. A specialist reviews your situation first and only proceeds further with your agreement.
What if I'm already on an ATO payment plan?
That's fine and often counts in your favour, because it shows you're engaging with the ATO. Some borrowers use a second mortgage to pay the plan out early, since debts on a payment plan continue to accrue general interest charge.