What is a 2nd mortgage?
A second mortgage is a charge over a property that already has another mortgage on it.
The mortgages are ranked in the order in which they were lodged.
So in the event that the debt isn’t paid and the property is sold, the first mortgage is paid back before any money is paid to the second or third mortgagee (lender).
Why would you use a 2nd mortgage?
Most people prefer to refinance their loan to another lender rather than obtain a second mortgage.
However, there are some situations where a second mortgage is more appropriate:
- Fixed rates: If your first mortgage is a fixed rate loan there may be high exit fees or you may not want to refinance because your fixed rate is much lower than the current variable rates. In this situation, you may borrow additional money using a second mortgage.
- Guarantor support: If you’re helping your children buy their first home then you may guarantee their loan using a second mortgage over your property.
- Private lenders: Many private lenders that can advance funds within 48 hrs will take a second mortgage behind a major bank as security for their loan but we recommend that you avoid using private lenders at all costs.
How much can you borrow?
Most lenders restrict your Loan to Value Ratio (LVR) to between 60-80% of the property value but we know banks that will lend more!
- Second mortgage with the same bank: Up to 95% of the property value.
- Second mortgage with a different bank: Up to 85% of the property value.
- Low doc: Not available except through private lenders.
- Discounts: Lenders rarely offer rate discounts on second mortgages.
- Note: The lender that has the first mortgage has to consent to you getting a second mortgage on your property. They don’t usually stop you from doing so but will usually charge a fee of around $300 for assessing your request.
Why are the banks so conservative?
By their very nature, second mortgages are very poor security for a loan compared to a first mortgage.
For example, if you had a mortgage with Westpac for $100,000 secured on your home and you then applied for a $100,000 loan with ANZ, this would be set up as a 2nd mortgage behind the Westpac loan.
In the event that you didn’t pay back your mortgages and the property was sold for $190,000, Westpac would be repaid in full and ANZ would receive whatever was left over.
Because of the complexities of two lenders being involved and the low priority of the debt in the event that you default on your loan, most banks limit the amount you can borrow or refuse to do business with you.
What are the drawbacks of 2nd mortgages?
Tough lending criteria
Once of the negative aspects of second mortgages is the fact they can be very time-consuming to apply for because the lending criteria is complex.
It’s common for bank staff to be unfamiliar with the process so a lot of mistakes can be made.
Luckily, an experienced mortgage broker will make the process run smoothly.
Refinancing at the end of your fixed term may be a cheaper option than paying the high fees typically associated with a second mortgage.