The Salt Path (II) - What Is a Second Lien?
not a good idea, for one thing
1. Introduction
This is a followup to my previous piece:
I have seen no confirmation that the protagonists of The Salt Path took out a Second Lien mortgage. But that would be consistent with two facts admitted by those protagonists: a) the loan carried an 18% interest rate and b) the house was taken from them in a court proceeding. In this followup piece, my aim is to explain what a Second Lien is and how it behaves.
Let’s deal with “lien” first. This means a charge or security placed over a valuable article, most often a house, to secure lending against that asset. “Mortgage” is yet another word for this; often though people use it to refer to the money they obtain from a bank or building society which they use to buy a house. Technically the mortgage is the security they give over the house they buy in order to borrow the money to buy it.1 It’s a legal claim the lender has over the house.
Let’s say you buy a house with a mortgage. You have some equity in it, meaning the house is worth more than the mortgage. You enter a scenario in which you want or need more money. You decide to borrow more against the value of the house. This would then be a “second lien,” because the “first lien” is the original mortgage. That first lien would get paid out first in the event of the house being sold (whether that sale be voluntary or involuntary). 2 If there is money left over after the first lien has been repaid, the second lien gets paid.3
2. Is Taking Out a Second Lien a Good Idea?
No.
Second Liens are like remortgaging, which I generally already think is a bad idea, but worse even than that.
People who remortgage without increasing the amount borrowed because they can get better terms than originally — especially if those better terms include a lower interest rate — are making a smart move. However, the majority of people who remortgage tend to say stuff like “it’s ok because we will spend it all on improvements to the house which will be fully reflected in its value.” What happens then is that they spend ten grand on windows and 15 grand on ten days in the Maldives. Maybe they have a great time but they also spend 25 years paying off that debt. Also, there is zero to negative value add to the house. House “improvements” often don’t increase resale value much — particularly if cosmetic or personal.
Second Liens are like this but I think a bit worse. Often they are separate to the main mortgage loan and given out by specialist firms.4 Second Lien loans clearly carry way more risk than first liens because they rank lower for repayment. For that reason, the interest rates are much higher than for standard mortgage lending. In the UK currently, you could expect to pay 12% to 14% interest.5
The most obvious reason why Second Liens are a bad idea is that if you don’t pay the interest (and at some point the principal) you lose your home.
Second Liens often default because they are so expensive and because of the situations of the people who take them out. Which I will discuss next.
3. Who Takes Out Second Lien Loans?
Desperate people, in short. People who absolutely must have access to funds right now and have no alternative. 6 It would be advisable only really in the way that taking a poisonous drug which kills 50% of people makes sense when the other option is an otherwise untreatable disease that is fatal in 75% of cases.
If I were advising you on whether it was appropriate to take out a Second Lien, there would be a very high bar before I would sign it off. You would still be free to ignore my advice and go ahead anyway. Two arenas would be central to the discussion: how are you going to service it and pay it back and what happens if you don’t take out the Second Lien? Let’s look at those two points.
If you take out a second lien with 18% interest, you are basically trying to run up a very fast escalator. If you do not pay off the interest in full every year, it will be added to the principal. Then — this is seriously bad — you start paying 18% interest on that unpaid interest amount. Etc. Basically if you don’t have a plausible story about how this Second Lien will be repaid in two or three years, it’s not worth doing. You just won’t be able to catch up. (I will provide illustrative numbers in the final section.)
Maybe your argument for taking out the Second Lien is that otherwise you will lose your house. My advice there would be that the house is already gone. The equity has been hollowed out, and you’re gambling on a bounce that won’t come. Your choices are between “lose the house now” or “lose the house in three years and generate an immense unpayable debt on top.” Would you enjoy those last three years?
Maybe it is better to take out a Second Lien than to go to prison. Maybe if you have received a terminal diagnosis, it could be your idea that you won’t be around to repay the loan. But the lender’s due diligence processes will cover your health status and it is always a good idea to be entirely truthful when making declarations to lenders.
4. Numerical Escalation
The way this compounding of unpaid interest works is quite dramatic. It’s driven by the interest on interest on interest … procedure.
Let’s say you take out a loan of £100,000 in 2018 at an 18% interest rate and you do not pay the interest. How much would you owe now?
In the first year, you should pay £18,000 of interest. If you don’t, you now owe £118,000.
In the next year, you’ve got to pay 18% of £118,000. That’s £21,240. You can see how this is already getting away from you.
In fact, mathematically, we are doing a calculation that looks like x to the power y. In 2025, 7 years have passed since 2018. 1.18 to the power 7 is 3.2. So that would turn a completely unpaid debt of £100,000 in 2018 into £320,000.7
One final point. Walking away from the house will probably not extinguish your liability. That’s because most lenders will insist on being secured not just on your house but also via a personal guarantee. That means you are personally on the hook for the lending. That continues to be the case even if you no longer own the house or live it in.
It continues to be the case even if you are dead (the lenders can sue your estate).
Disclaimer
This post is a general explanation of financial instruments — in this case, second lien loans — and their typical risks and uses. While it references The Salt Path in the title and framing, nothing in this post should be taken as a statement of fact about the authors of that book, their personal circumstances, or the events described therein.
I have no personal knowledge of the individuals involved, nor of their financial arrangements, and I make no assertion as to the truth or falsehood of any account, public or private. This is not investigative journalism, legal commentary, or medical analysis. It is simply a general-purpose discussion of a type of secured loan that has been referenced in connection with certain narratives.
All examples given are entirely hypothetical and illustrative only. They are not based on any real person or case, and no implication should be drawn that any individual has taken out such a loan, defaulted, or behaved imprudently. If you require advice on your own situation, or are involved in any related dispute, you should seek qualified legal and financial counsel.
If any party referenced herein believes they have been misrepresented, they are welcome to contact the author to seek clarification or correction. Any such contacts may be made via email (ramrod.allegro5r@icloud.com) and will receive an immediate response. They may also be made via comments where they will also receive an immediate response.
Another usage would be a “mechanic’s lien.” This is not a phrase you are going to hear frequently, but you will be familiar with the idea once I describe it to you. If you take your car to a garage for major repairs that cost ten grand, you can’t drive the car away without paying. You cannot say “I own that car” (although that’s true) “and I’m taking it” because the mechanic has security over the car to the extent of the ten grand you owe.
Something similar to this in the US would be a HELOC, which stands for Home Equity Line of Credit.
The fact that I am saying “if there is money left over” should already serve as a bit of a red flag about second liens.
If you are thinking I am using “specialist” in a somewhat pejorative sense here, you’re right.
Clearly, 18% is high even compared to these levels.
This is another reason I think these loans are a bad idea. You are labelling yourself a problem borrower to the financial system.
This works the other way around, in your favour if you are investing. If (miraculously) you were able to achieve an 18% return on your investments a year for 7 years, you would have more than tripled your money.