What is dual financing?

Two lenders agree separate facilities for the one deal: for example a bank provides a senior mortgage while a non-bank provides a mezzanine loan or second mortgage. The senior facility is repaid first, and the subordinated lender accepts a lower place in the queue in exchange for higher pricing and often stricter covenants. In a development, each lender may finance a different stage, such as the land purchase and the construction, with its own draw triggers and holdbacks.

The intercreditor agreement is the playbook if things go wrong. It allocates control between the lenders, sets the enforcement steps and governs refinancing. Without a clear one, you risk disputes over who can appoint receivers, sell assets or accelerate a loan.

The classic form is senior plus subordinated: a bank as senior lender and a mezzanine lender behind it, used by developers who need extra borrowing for land or early construction costs. A first plus second mortgage does a similar job for an investor with limited equity, where the first mortgage covers most of the LVR and the second tops up the shortfall.

A bank plus non-bank bridge pairs a bank's longer-term finance with a fast bridging loan for settlement or renovation while bank underwriting completes. Other formats include co-lending on large transactions where no single lender wants the whole exposure, development finance followed by end-finance from another lender on completion, and asset-specific splits where one lender finances the equipment and another lends against the property.

Dual lending can raise borrowing capacity beyond a single lender's limit, pair a mainstream bank's pricing with a specialist lender's speed, and let each facility be shaped to its purpose, whether land, construction or working capital. A non-bank bridge can also secure a settlement quickly while the bank's underwriting completes.

The trade-offs are cost and complexity. Subordinated debt charges more, the second-ranking lender can lose most of its money if the asset value falls, and the ICA can restrict what you do, such as selling assets or refinancing. Refinancing both facilities at the same time can be difficult if conditions change, and running two sets of covenants, reports and fees adds administration.