Money - 21 Sep, 2020

What to know about getting a second mortgage?

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A second mortgage is a loan that uses the equity in the borrower’s home as collateral. When you apply for a second mortgage you are putting another loan on a property with an existing loan. These home loans then discharge in the order of lodgement at the time of property sale. For instance, you secured one mortgage in 2014, and another in 2017, so the 2014 mortgage receives pay-out first. Any remaining funds then pay off the second mortgage.


What is a Second Mortgage?

Simply put, a second mortgage is another home loan on the same property. While you can borrow more money, often lenders restrict the amount lent due to the property having another mortgage. This is beneficial as it allows you to:

  • Tap into your home equity – If you’ve had your mortgage for years, then your home value is probably more and the amount owed on your loan less. Therefore, a second mortgage enables you to access this capital.
  • Acquire a lump sum – You can borrow larger sums as the loan securing is against your property. Plus, the interest you’ll pay is less than other forms of borrowing. Therefore, you save more long-term.

Why do you need a second mortgage?

There are many reasons why someone takes out a second mortgage. The most common are:

  • Fixed rates – If your first mortgage is fixed and you need funds, then sometimes it’s cheaper to acquire a second mortgage. Why? Well, the fixed rate may attract a break fee if you decide to refinance your first mortgage. Therefore, by leaving this mortgage alone and taking out a second mortgage, you avoid incurring any break fees.
  • Equity – a second mortgage allows you to access the equity in your home which can help free up your cash flow. Accessing the equity in your home means you can work towards paying down and consolidating your debts.
  • Guarantor support – If you’re looking to help your children buy a home, then a second mortgage enables you to finance your guarantee.

Can you qualify for a second mortgage?

Most Australian lenders are reluctant to approve an application for a second mortgage. This is usually because second mortgages are seen as a high-risk borrowing option due to the lower priority placed on the second mortgage.

Before anything, you must first have enough equity in your home to satisfy your lender.

If you want to take out a second mortgage, you’ll need to get approval from the lender that financed your first mortgage. You’ll typically need to pay a fee or a few hundred dollars to get the first lender to assess your request.

If you’re taking out a second mortgage with the same lender that offered your first mortgage, you may be able to borrow up to 95% LVR (loan to value ratio). Whilst, borrowers taking out a second mortgage with a different lender may be able to access a loan with up to 85% LVR allowed.

Get home loan ready with a conditional pre-approval

eChoice can help you estimate what you can afford to borrow, giving you the confidence to make an offer on the property of your dreams. Applying for conditional pre-approval could help you:

  • Know how much you could potentially afford to borrow
  • Plan your budget
  • Be confident to make an offer
  • Be seen by real estate agents as a serious buyer

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What are the advantages of a second mortgage?

People choose to take out a second mortgage for a wide range of reasons. Here are some of the advantages that people look at getting from a second mortgage:

  • Access equity – a second mortgage allows you to access the equity in your home.
  • Debt consolidation – accessing this equity means you can work towards paying off and consolidating your debts.
  • Alternative to refinancing – a second mortgage also provides and alternative to refinancing, which may involve break costs, exit fees and other legal fees.
  • Home renovations or repairs – accessing your home equity can also allow you to make needed home renovations or repairs, which can increase the value of your property.
  • Going guarantor – if you are going guarantor on a loan for a family member or friend, then you can use a second mortgage over your property as additional security for the bank or lender.
  • Interest rates – interest rates on second mortgages are generally lower than rates on credit cards or personal loans. Because your home pays back the loan, you reduce the risk for the lender.

Compare your interest rate today.

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You might also like: How do guarantor loans work?

You could use your equity to access additional funds

If you have equity in your existing home or investment property, you could apply for a supplementary loan. Our home loan consultants can estimate for you how much you might be able to borrow using that equity. If approved, you could then be able to use that money for a variety of different purposes according to your needs.

You might also like: What is a debt consolidation home loan – and how can it help you manage your debts?

What are the drawbacks of a second mortgage?

Apart from strict second mortgage lending criterion, other problems you may encounter are a lack of experience and fees. Let’s look at these in greater detail now.

  • Strict lending criterion – A second mortgage attracts added risk. Therefore, a lender will want to know who holds your first mortgage, and the amount They also need proof of income, assets and liabilities. Plus, they may ask to see several other documents.
  • Lending inexperience – A second mortgage is not common, so banking staff may be unfamiliar with the process. This lack of knowledge can lead to longer waiting times and sometimes even errors.
  • Fees – Before you opt for a second mortgage, ask about the charges as these can add up. As a result, you may find it cheaper to refinance your first mortgage.
  • Risk of foreclosure – the highest risk of taking out a second mortgage is losing your home if you fail to make the necessary repayments. The lender can take your home through foreclosure.

Speak to one of our home loan consultants to get your free personalised property report for your preferred suburb or property. They’ll also estimate your upfront buying costs (e.g. stamp duty, legal fees).

Updated by Ece Demir on 01 September 2020

Do you want to know more about a second mortgage? Then contact eChoice, we can help you find out your eligibility. Our brokers also have access to 100s of home loan products. So, we’ll find you the right mortgage.

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