What are second mortgage loans?

If you have a mortgage, it is possible to take out a second one on the same land. Let’s try to explain how.

What is a second mortgage?

A second mortgage is when you borrow money a second time, with your property serving as collateral for the loan.

You still have to deal with regular repayments for a second mortgage, but the first mortgage always takes priority – if you can’t repay your loans and have to sell the property, the first loan is paid off first.

This means that the second mortgage is more risky for the lender and therefore may be more difficult to acquire as a borrower.

You will most likely need to get a second mortgage from another lender, and there may be higher interest rates or fees as insurance for the extra risk the lender is taking on.

Why get a second mortgage

For most borrowers, refinancing your existing loan with a new lender provides a safer option because it allows you to borrow more.

Taking out a second mortgage is typically used to free up cash, usually in situations where refinancing your current mortgage is difficult.

For example, borrowers who have a fixed rate home loan may face high fees if they break their mortgage by refinancing their home loan.

Another scenario would be if a borrower has built up equity in their home and wants to use that equity in their home to purchase another investment property, but cannot refinance their first mortgage.

Reasons why a person can take out a second mortgage:

  • Freeing up money for a renovation

  • Parents guaranteeing the children’s mortgage

  • Access equity to purchase an investment property.

Case study

Mort Gage has a mortgage on a $300,000 loan from his first lender. He then takes out a second mortgage for $300,000 with a second lender.

His house is secured on both loans.

Mort is unable to make his mortgage payments and eventually defaults, which means the first lender has the right to sell his house.

The house is sold for $360,000. This means that the first lender is repaid first. The $300,000 loan is repaid to the first lender, with the remaining $60,000 going to the second lender.

This means that the second lender only received part of the mortgage, demonstrating why lenders are reluctant to allow borrowers to take out a second mortgage because there is more risk.

How to get a second mortgage

When considering a second mortgage, it may be best to refinance your current home loan before contacting lenders about a second mortgage.

As second mortgages are high risk for lenders, they are more difficult to obtain. If you take out a second mortgage, you may face higher fees due to the additional risk the lender is taking on.

Contacting a mortgage broker can help you find a second mortgage. You can also contact a new lender to find out what second mortgage products they offer.

What to consider when applying for a second mortgage

Financial stress

The most important thing to consider when taking out a second mortgage is whether you can actually afford the repayments. Taking out a second mortgage means managing two loans, which could lead to financial hardship.

Interest rate

Since second mortgages are riskier for lenders, the interest rate they charge will likely be higher than your current home loan.

When comparing, always look at the interest rate you will be charged for your second mortgage, as well as any additional fees.

Additional fees from the first lender

If you decide to apply for a second mortgage with another lender, your first lender may charge you additional fees. They should also be aware of your second mortgage application.

Loan criteria

A second lender will also have their own criteria for determining whether or not you are financially able to handle a second mortgage. These criteria will generally be stricter than a first mortgage due to the risk the lender is taking.

Are you buying a house or looking to refinance? The table below shows home loans with some of the lowest interest rates on the market for homeowners.

Basic criteria: a loan amount of $400,000, variable, fixed, principal and interest (P&I) real estate loans with an LVR (loan-to-value) ratio of at least 80%. However, the “Compare mortgages” table allows calculations to be made on the variables selected and entered by the user. All products will list the LVR with the product and price list which is clearly published on the product supplier’s website. Monthly repayments, once the basic criteria are modified by the user, will be based on the advertised prices of the selected products and determined by the loan amount, repayment type, loan term and LVR as entered by the user. user/you. *The comparison rate is based on a loan of $150,000 over 25 years. Please note: this comparison rate is only true for this example and may not include all fees and charges. Different terms, fees or other loan amounts may result in a different comparison rate. Rates correct as of June 16, 2022. See disclaimer.

Image by Mohd Azrn via Unsplash

The whole market has not been taken into account in the selection of the above products. Instead, a reduced portion of the market was considered. Products from some vendors may not be available in all states. To be considered, the product and price must be clearly published on the product supplier’s website. Savings.com.au, yourmortgage.com.au, yourinvestmentpropertymag.com.au and Performance Drive are part of the Savings Media group. In the interest of full disclosure, Savings Media Group is associated with Firstmac Group. To learn how Savings Media Group handles potential conflicts of interest, as well as how we are paid, please visit the website links at the bottom of this page.

Garland K. Long