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.
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.
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.
- Guarantor support – If you’re looking to help your children buy a home, then a second mortgage enables you to finance your guarantee.
The amount you can borrow using a second mortgage depends on several factors. These are:
- Borrowing with a lender other than a bank – Most lenders restrict the amount you can borrow to 60-80% of your property value. However, banks will lend you more.
- Borrowing with the same bank – If you have your first mortgage with a specific lender you can borrow up to 95% of your home’s value.
- Borrowing with a different bank – When you take out a second mortgage with another lender you can borrow up to 85% of property value.
Before you apply for a second mortgage, you’ll need to inform your first lender of your intent. Your first lender then needs to approve the second mortgage. Plus, you also need to be aware your first lender may charge you a second mortgage approval fee. Usually this fee is under $300.
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.
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 100’s of home loan products. So, we’ll find you the right mortgage.