What is a private mortgage and how does it work?

What exactly is a private mortgage?

A private mortgage is a loan secured by a registered mortgage over real estate, funded by a non-bank source. That source might be a specialist lender, a mortgage fund, a group of wholesale investors or, occasionally, a private individual. The word “private” describes who is providing the money, not how formal the paperwork is. The security is still registered on the certificate of title through the relevant state or territory land registry, and the lender has the same rights over the property as any other mortgagee.

Most Australians meet the idea of a mortgage through a bank. A bank assesses a household against standardised policy: payslips or two years of tax returns, a clean credit file, a standard residential property, and a repayment capacity that fits tight serviceability rules. When a borrower falls outside those boxes, the application is often declined, even though the property might hold plenty of equity. A private lender starts from a different question: is the security sound, and is there a believable way to repay the loan at the end of the term?

Ownright Custom Finance arranges private first and second mortgages Australia-wide. Director Trevor Scott has spent more than 40 years in finance, and a large part of the team’s work is understanding which private lender is the right fit for a situation that a bank has already turned away.

How is a private mortgage different from a bank loan?

The differences are less about paperwork and more about priorities. A bank loan is built around the borrower’s ongoing income. A private mortgage is built around the property and the exit.

Feature	Typical bank home loan	Typical private mortgage
Main assessment focus	Income and servicing	Property, equity and exit plan
Income evidence	Full documents usually needed	Often more flexible; depends on the lender
Credit history	Strictly scored	Discussed in context
Term	Long, often decades	Usually shorter, frequently months to a few years
Repayment style	Principal and interest common	Interest-only, interest prepaid or capitalised often available
Property types	Standard residential favoured	Wider range considered, including unusual or rural
Speed	Weeks is common	Can be faster, depending on lender, security and documents
Pricing	Standardised tiers	Set on the individual situation

The flexibility is real, but it comes with trade-offs. Terms are shorter, so the borrower needs a plan for what happens next. Pricing reflects the risk and speed involved, which is why private lending suits particular situations and is not a default replacement for a bank loan.

Who lends private mortgage money in Australia?

Several types of funder operate in this part of the market, and a good broker knows which one fits each file.

• Non-bank specialist lenders that lend from their own balance sheet or warehouse funding and have defined credit appetites.
• Mortgage funds and mortgage managers that pool investor money and lend it out against property security.
• Wholesale and sophisticated investors who fund individual deals, often through a manager.
• Private individuals who lend their own funds, commonly when there is a relationship or a very particular property.

Credit activity in Australia sits under the National Credit Act, which ASIC administers. Whether a particular loan is regulated depends largely on its purpose. A loan for a personal or household purpose is generally regulated consumer credit, while one for a business or investment purpose is generally outside that regime. Ownright works within that framework as a credit representative and handles the classification so borrowers do not have to untangle it.

What kind of security does a private lender take?

The security is almost always real property, and the lender’s position depends on ranking.

1. First mortgage. The lender is first in line against the property. It is the strongest position and is typically used where there is no existing finance or the existing lender is being repaid out.
2. Second mortgage. The lender ranks behind an existing first mortgage. It is used to release equity without disturbing the first loan, and it depends on how much equity remains. See the guide on second mortgage pros and cons for the trade-offs.
3. Caveat. In some short-term situations, a lender may secure its interest with a caveat lodged on title, which can later be converted to a registered mortgage. Land Services Victoria describes a caveat as a document that warns prospective buyers that a third party may have rights over the property. Our guide on what a caveat loan is goes through the mechanics.

Property types a private lender may consider include residential homes, vacant land, commercial buildings, rural and lifestyle holdings and sometimes mixed-use or specialised assets. The more unusual the property, the more a lender will want to know about marketability, which is why valuation and location come up so often in the assessment.

How does a private lender decide whether to approve?

Private lenders typically look at four things, roughly in this order.

The property. Where it is, what it is, how liquid it would be to sell and whether there are any title issues, zoning limits or environmental flags. A property in a thin market is assessed more conservatively than one in a deep one.

The equity. The relationship between the loan amount and the value, usually expressed as a loan-to-value ratio. Lenders set their own limits, and those change with the property type and the loan ranking.

The exit strategy. How the loan will be repaid. This is the single most important element, and the one that applicants most often under-prepare.

The borrower. Background, experience, current position and the reason for the borrowing. Credit history is considered, but usually in context. Our guide on how private lenders assess your loan explains the process in more depth.

What is an exit strategy and why does it matter so much?

An exit strategy is the specific, credible way a private loan will be repaid when the term ends. Because private mortgages tend to be shorter, the lender wants evidence that the borrower is not simply hoping for the best.

Common exits include:

• Refinancing to a bank or longer-term lender once the obstacle that blocked the bank has been resolved, for example a late tax lodgement being completed or a business reaching two years of trading.
• Selling the security property or another asset, with a contract of sale already signed or a listing plan in place.
• Receiving funds from a settlement, such as a property sale, an inheritance, a divorce property division or a business sale.
• Completing a development or renovation and refinancing against the improved value.

A weak exit is a plain statement that the loan will be refinanced later. A strong exit has evidence behind it: a broker’s written strategy, an accountant’s confirmation of when lodgements will be finished, a contract of sale with a settlement date. Our guide on bridging loan exit strategies looks at exits in much more detail.

Who does a private mortgage suit?

Private lending is a tool for particular circumstances. It tends to suit people who:

• Have been declined by a bank but hold meaningful equity in a property.
• Are self-employed or have irregular income that bank policy struggles to read.
• Need to move faster than a bank can, for example to meet a settlement date or a deadline.
• Have an ATO debt, arrears or a past credit event that is being resolved.
• Hold an unusual asset such as rural land, a development site or a mixed-use property.
• Need short-term funds between two events, like buying before selling.

It is less suited to someone who qualifies comfortably for a bank loan, has no pressing deadline and wants a long-term low-maintenance facility. In that case the bank route will often be the sensible one, and a straightforward broker conversation will say so.

What does the process look like step by step?

A typical private mortgage runs through five stages, and the timing of each depends on the lender, the security and how quickly documents arrive.

1. Conversation and scoping. A broker asks about the property, the purpose, the timeframe and the exit. This is where unrealistic structures are filtered out.
2. Indicative terms. The broker presents the file to one or more suitable lenders and gets feedback on whether it fits their appetite.
3. Application and valuation. Documents go in, and the lender instructs or accepts a valuation. Valuation timing often sets the pace of the whole file.
4. Approval and offer. The lender issues a letter of offer. Borrowers and any guarantors are encouraged to take independent legal advice before signing.
5. Settlement. Mortgage documents are signed, funds are disbursed and the mortgage is registered on title.

Settlement mechanics differ between states, though electronic conveyancing handles most of the process these days. The guide on how fast private lending can settle looks at what drives the timetable.

What documents help a private mortgage application?

Private lenders generally need less than banks, but not nothing. Having these on hand tends to smooth the path:

• Photo identification for all borrowers and guarantors.
• Current title search or details of the property, plus council rates notice.
• Details of existing mortgages and a recent loan statement.
• A short written summary of the purpose of the loan and the exit strategy.
• Evidence supporting the exit, such as a contract of sale or accountant’s letter.
• Basic financial information, depending on the lender: sometimes tax returns, sometimes bank statements, sometimes a declaration.
• Any ATO payment plan documents or correspondence, if there is a tax debt in play.

Ownright will tell you which of these actually matter for the lender in question, and which can be left out.

An illustrative scenario

This scenario is illustrative only and uses no real names. A self-employed owner of a house with substantial equity has a business tax return that is two years behind, so a bank has declined a refinance. A settlement on another property is due in about eight months. A private first mortgage that repays the existing lender, with the settlement as the clear exit, may fit. The borrower uses the term to lodge the outstanding returns, and the bank then becomes a realistic option if the settlement slips. The point is not the numbers, which vary with every file, but the logic: a short private facility with a documented exit that buys the time to fix the problem.

What mistakes should borrowers avoid with private mortgages?

• Treating the exit as an afterthought. Lenders spot this quickly and borrowers feel the pressure at month ten.
• Underestimating how long a sale or refinance takes. A term that ends exactly on the planned settlement date leaves no room for delay.
• Signing without independent legal advice. Private lending documents are enforceable in the same way as any other mortgage.
• Focusing only on the headline cost. The total cost of the facility over its life, including how interest is paid, matters more than any single figure.
• Applying to many lenders directly at once. Multiple enquiries can leave a confusing trail. A broker coordinates the approach.
• Ignoring existing mortgage conditions. An existing lender may need to consent to a second mortgage, and that conversation should happen early.

How does Ownright approach private mortgages?

Ownright Custom Finance is built around finding solutions where a bank has said no or the situation does not fit a template. That means sitting down with the property and the story, working out what the real obstacle is, and then matching the file to the lender most likely to understand it, including funding options that most brokers do not know exist. The head office is in Knoxfield, Victoria, and the team arranges private finance in every state and territory.

If the right answer turns out to be a bank loan or no loan at all, you will hear that too. Questions are welcome on 03 7043 7233, or you can start an application and a broker will come back to you.