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Second Mortgage

What is a second 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.

In the event that the debt isn’t paid and the property is sold, the lenders will receive their money in order of priority, with the 1st mortgage being paid back before any money is paid to the second or third mortgagee.

Why would you use a second mortgage?

Most people prefer to refinance their loan to another lender rather than obtain a 2nd mortgage.

However, there are some situations where a 2nd mortgage is more appropriate:

  • Fixed rates: If your 1st mortgage is a fixed rate loan then 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 as additional security for the bank.
  • 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. 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 2nd mortgages.
  • Note: The lender that has the 1st mortgage has to consent to you obtaining a 2nd mortgage on your property. They do not 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, 2nd 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 loans and the property was sold for $190,000 then 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.

Fees

Refinancing at the end of your fixed term may be a cheaper option than paying the high fees typically associated with a second mortgage.

If you’d like to know more about refinancing to release equity versus second mortgages, please give us a call on 1300 889 743 or complete our free assessment form.

  • Rose

    Hello. How do we arrange the second mortgage consent for my parent’s property as they’ll providing guarantee for me to purchase my home next month.

  • Hi Rose, your parents will have to contact their lender to arrange second mortgage consent. Usually, the lender will provide consent for the second mortgage.

  • Luc1nda

    Hi, I don’t have enough deposit for a home loan so I’m thinking of having my parents guarantee my loan with a second mortgage since they already have a home loan secured on their property. Will this be a problem?

  • Hey Luc1nda,

    This isn’t a problem in most cases, however, it can be an issue if your application isn’t submitted to the bank correctly. Do not commit to a property until:
    – Consent for the second mortgage has been granted,
    – A bank valuation has been completed on your guarantor’s property, and
    – Your lender has issued a formal approval.

    The lender that already has a home loan secured on your parents’ property needs to give consent to the guarantee being secured on the property. There is a small risk that they will deny or withhold the consent which can leave you high and dry. The method of calculating the equity in your parents’ property can be very complex if they already have a loan so please call us on 1300 889 743 for more information or you can simply try our guarantor loan calculator:
    https://www.homeloanexperts.com.au/mortgage-calculators/guarantor-loan-calculator/

  • A Cooke

    Is it a simple quick-and-easy process to get second mortgage consent?

  • Hello A Cooke,

    It depends on the lender. Some lenders that hold the first mortgage will not allow a second mortgage to be taken out. Different banks have different requirements that must be met to secure the second mortgage consent. Most don’t usually stop you from doing so, but will usually charge a fee of around $300 for assessing your request.

  • Buzzz Lightsaber

    Hi

    If we currently have a property which we rent out at almost no cost to us, and which is being guaranteed by my parents, are we still able to buy more properties mindful that our cash flow is still strong and that the first property being guaranteed isn’t costing us anything?

    Thanks

  • Hi Buzz,
    The way banks calculate your borrowing power is complicated https://www.homeloanexperts.com.au/how-much-can-i-borrow/how-do-banks-calculate-my-borrowing-power/
    It’s good that you’re cashflow neutral with your current property however banks will look at the income from your jobs and will assess your old and new loans at a rate higher than the actual rate. Typically they use around 7.25% which is almost double the cost of the cheapest loans we have available! They do this to allow for future rate increases.

    It is possible to buy a second property however many lenders will only allow you to buy one property using a guarantee from parents. Some of our lenders will allow another guarantor (e.g. your partner’s parents) or will allow us to remove the current guarantee https://www.homeloanexperts.com.au/guarantor-home-loans/removing-a-guarantor-guarantee/ if it is no longer required and then apply for a new guarantor loan.

    We’d need to see your full situation to know what option is best and how much you could borrow. It’s definitely possible if you’re in a good position. https://www.homeloanexperts.com.au/free-quote/

  • hacksaw

    I have a loan with Rams right now and I want to get a second loan for $700k at 80% LVR. Can you help me get my second loan?

  • If your mortgage exposure is more than $1m then you may need to use BAS and not accountant’s letter, which can be a problem. Also, a higher loan amount may mean that you’ll get a lower LVR e.g. 60%. We do however have a few other lenders in mind so please call 1300 889 743 to discuss all this in detail.