When it comes to property finance in Australia, the order of who gets paid first can make a world of difference. That’s where subordination agreements step in—a behind-the-scenes legal tool that can dramatically affect your mortgage, your ability to refinance, and the risks lenders take. Whether you’re a homeowner looking to access equity or an investor managing multiple loans, understanding subordination agreements is more important than ever in 2025.
What is a Subordination Agreement?
A subordination agreement is a legal document that changes the priority of debts secured against a property. In plain English, it decides which lender gets paid first if the property is sold or repossessed. Without this agreement, the order is typically determined by the date the loans were registered. But when refinancing, taking out a second mortgage, or restructuring debt, a subordination agreement can bump one lender ahead of another in the queue.
- First mortgage: The primary loan used to buy a property. Usually has first claim on sale proceeds.
- Second mortgage: Any additional loan secured against the property, such as a line of credit, typically ranks behind the first mortgage.
- Subordination: With an agreement, a lender may agree to take a lower priority, allowing another lender to take precedence.
In 2025, as refinancing activity remains high amid fluctuating interest rates, subordination agreements are increasingly common. Lenders are more cautious, and these agreements help manage their risk exposure.
Why Do Subordination Agreements Matter in 2025?
Australia’s mortgage market is evolving. With the Reserve Bank of Australia (RBA) implementing new lending guidelines in response to continued inflationary pressures and a competitive refinancing landscape, subordination agreements are a key tool for both borrowers and lenders.
- Refinancing surge: As of early 2025, over 30% of Australian mortgage holders have refinanced in the past two years. Many have existing second mortgages or lines of credit, requiring subordination agreements to proceed smoothly.
- Equity release and investment: Homeowners tapping into home equity for renovations or investments often find their new loans subordinated to existing mortgages. Without a clear agreement, refinancing can stall or incur higher costs.
- Regulatory scrutiny: APRA and ASIC have updated their oversight on loan risk structures. Lenders now require airtight subordination agreements to satisfy capital adequacy and risk assessment rules.
Example: Jane owns a house with a $400,000 mortgage and a $50,000 line of credit secured as a second mortgage. She wants to refinance her main mortgage to a lower rate. Her new lender will only approve the refinance if the second mortgage lender signs a subordination agreement—ensuring the new primary mortgage takes precedence.
Risks and Benefits: What Should Borrowers Watch For?
Subordination agreements can be a powerful enabler, but they also come with important risks and considerations:
- Loan approval delays: Negotiating a subordination agreement can take days or weeks. If the second mortgage lender refuses, refinancing may be blocked.
- Interest rates and fees: Some lenders charge administrative fees to process subordination. Others may increase interest rates on subordinated loans due to increased risk.
- Legal implications: If the agreement isn’t watertight, disputes can arise in the event of property sale or default, potentially leading to costly litigation.
For investors with complex portfolios, subordination agreements can also impact borrowing capacity. Lenders may limit how much they’re willing to lend on properties with multiple encumbrances, or require stricter terms to mitigate risk.
How to Navigate Subordination Agreements in 2025
Success with subordination agreements comes down to preparation and clear communication:
- Talk to your mortgage broker early if you’re planning to refinance or add another loan.
- Gather all relevant loan documents, including details of existing mortgages and any caveats on title.
- Request subordination terms in writing and review the agreement with a property lawyer to ensure you understand the implications.
- Factor in potential delays and costs when planning your refinance or investment move.
In 2025, with lenders more risk-averse and compliance requirements rising, a proactive approach to subordination agreements can mean the difference between smooth approval and missed opportunity.
