There is often confusion about what a second mortgage is, when it is useful, and how to take full advantage of its benefits.
In this article, we aim to simplify the definition of a second mortgage, identify its key uses and tell you how you can approach your decision to take out a second mortgage strategically.
First things first. What is a second mortgage?
A second mortgage is where you take out an additional mortgage against a property that is already mortgaged.
Pretty simple right? Attaining that second mortgage, however, is not as simple as there are various factors to consider, such as:
– The type of mortgage you currently have (fixed, variable, offset)
– The value of the second mortgage and the equity available in your current mortgage
– The use for the second mortgage (i.e. investment, second home, house for a child)
Why get a second mortgage?
Generally, there are two reasons why second mortgages are considered as an option for borrowers:
1. To increase overall borrowing to purchase a second home or investment property
2. When acting as a guarantor to help a child purchase a home
Refinancing is the most popular approach for accessing additional funds to invest or buy a second home. However, refinancing isn’t always the best option as a borrower might be locked into a fixed rate home loan with high exit fees, or the borrower’s fixed rate may be lower that the variable rate on offer.
How do you get a second mortgage?
You can apply for a second mortgage with an existing lender, a new lender or by using a mortgage broker who can help you find a range of options.
A second mortgage, however, isn’t as common as traditional home loans or investment loans and the application process can often be time-consuming requiring additional documents and processing requirements.
Traditionally, lenders approach second mortgages with caution as there is much less security on this type of loan compared to mortgages. If a borrower cannot pay the debt and the property is sold, lenders are paid in order of application, i.e the first mortgage is paid first, then the second. Therefore, many lenders have a conservative approach to lending second mortgages.
A strategic approach.
Before making a decision on a second mortgage, it’s best to first identify your goals for that mortgage and your current financial position.
In our experience, often customers who inquire about a second mortgage get the term confused with refinancing. Refinancing is the most suitable option for home owners wanting to increase their current mortgage to access additional funds or to consolidate debts. This can be done with an existing lender, or by moving to another lender who may have a more affordable product.
If your goal is to act as a guarantor for your child, a second mortgage could potentially be a great strategy as it may help you avoid paying LMI (Lenders Mortgage Insurance).
If you goal is to buy a second home, taking a second mortgage could lead to higher interest rates and the process could be very time-consuming. Refinancing may be a better option for you.
Take the next step.
As we always say, everyone’s situation is different and getting the right advice can save you thousands in the long run. If you’re in the process of deciding upon a second mortgage, chat to our team of brokers for a free consultation and we can help you identify a strategy to achieve your goals. Call us on 1300 652 842 or email email@example.com.