Considering a second mortgage? It’s a big step, but with the right consideration, they can prove very effective in helping you fund new ventures or cover financial gaps.
Whether you’re considering buying another property, dealing with debt, or starting a new business, you should always take the time to understand how two separate mortgages on one property will operate to ensure it is the right choice for you.
In this article, our specialists at Pacific 8 will explain the essentials of a second mortgage loan.
What is a Second Mortgage?
A second mortgage in Australia is simply another loan secured by a property that already has an existing mortgage. The term “second” comes from the fact that this mortgage sits behind your first one in priority.
If you encounter financial issues and the property must be sold, the first lender will receive payment before the second.
How Do Second Mortgages Work?
When you take out a second mortgage, you’re borrowing against the equity in your home, just like with your first mortgage. Your new loan can be with a different lender, though, adding another layer to the process, particularly if you do not want to disturb, refinance or alter the existing loan with the first lender. The second lender places a claim on your property, which means they have a legal right to it if you default on your payments.
That said, before you can get a second mortgage, your first lender will need to approve it. Furthermore, consider doing an “equity check” to ensure you have enough equity in your property for a second mortgage loan; most lenders want you to keep at least 20% of the equity after the new loan is taken out.
Why Consider a Second Mortgage Loan?
Given the unique nature of personal and commercial finances, there are many reasons why someone might consider a second mortgage in Australia, including:
- Home Improvements: Do you need funds for a major renovation, an extension, or massive restorations/repairs? A second mortgage could provide the cash you need to get started.
- Buying Another Property: A second mortgage might be the best option if you’re considering buying an investment property without incurring any relocation costs or tax burdens if you sold an existing property.
- Consolidating Debt: You can use a second mortgage to pay off high-interest debts, making your payments more manageable at more favourable interest rates.
- Starting a Business: Some people use the equity in their home to kickstart a business venture.
The Benefits & Potential Drawbacks of a Second Mortgage
Like any financial decision, taking out a second mortgage has pros and cons to think over:
Pros:
- Access to Equity: A second mortgage lets you tap into your home’s equity without selling it.
- Flexible Use of Funds: You can use the money for home improvements, debt consolidation, buying a second property, or even starting a business.
- Keep Your First Mortgage Rate: If your first mortgage has a good interest rate, a second mortgage allows you to borrow more without refinancing the entire loan.
- Avoiding Refinance Costs: A second mortgage can be a cost-effective alternative to refinancing, especially if locked into a low fixed rate.
- Boost Your Financial Flexibility: Increase your available capital, giving you more options for managing your finances.
Cons:
- Higher Interest Rates: Because second mortgages are riskier for lenders, they usually have higher interest rates.
- More Debt: Taking out a second mortgage increases your debt load, which could stretch your finances thin.
- Risk of Losing Your Home: If you can’t keep up with payments, you risk foreclosure since both lenders have claims on your property.
Thinking About Buying a Second Property?
If you plan to buy another property, a second mortgage could be a smart way to finance it, as long as you first undertake some careful and clever planning.
Steps to Follow:
- Check Your Equity: First, see how much equity you have in your current home. For example, if your home is worth $800,000 and your existing mortgage is $400,000, you have $400,000 in available equity. Assuming you want to hold onto the recommended 20%, you can borrow approximately $320,000.
- Consider the Costs: Don’t forget to factor in all the direct and indirect costs, including interest, lender fees, and government charges.
- Get Pre-Approved: Before making an offer on a second property, get pre-approval for your second mortgage to ensure you can secure the funds you need.
Can You Split Your Mortgage Between Two Banks?
Yes, it’s possible to have mortgages with two different lenders. If your first lender isn’t willing to provide additional funds, you can turn to another lender for a second mortgage in Australia.
To do so, be mindful of:
- Lender Consent: Your first lender must agree to register a second mortgage on your property.
- Fees: Some lenders might charge fees for reviewing and approving a second mortgage.
- Complexity: Managing two loans from different lenders can be tricky and may require extra effort to coordinate.
How Many Mortgages Can You Have?
Technically, you can have multiple mortgages on a single property, provided you manage enough equity to meet the lending requirements.
Discuss Whether a Second Mortgage Loan is Right for You in Australia with Pacific 8
A second registered mortgage can be a practical solution to leverage your home’s equity. But like any major financial decision, it’s vital to understand the risks, costs, and benefits. By carefully assessing your situation and consulting with a mortgage broker, you can make a well-informed choice that suits your needs.
Speak with our specialists at Pacific 8 to discuss your options and determine whether a second mortgage in Australia is right for you.
