What is a second mortgage?
The term ‘second mortgage’ comes as a result of borrowing money a second time by applying for another loan with the same property as security. The second mortgage sits behind your first mortgage, which means that if you don’t repay debts and your property is sold, your first mortgage will be repaid before your second. Typically a second mortgage is taken out with a different bank or lender to that of your initial or ‘first’ mortgage.
How does a second mortgage work?
A second mortgage is taken out against the equity in your home, given the fact that an initial or ‘first’ mortgage is already in play. As noted above, second mortgages sit behind your first mortgage since the initial mortgage is to be repaid first.
Second mortgages present risk for a lender because they may not receive the full mortgage amount in return. For example, let's assume you have a mortgage for $600,000 secured on your home with one bank and you apply for a second mortgage of $200,000 on the same home with another bank.
If you were unable to repay either mortgage and the property is sold for $650,000, the first bank would be repaid in full, with the second bank receiving all that is left over.
Why take out a second mortgage?
If you plan to use the equity in your home to access additional funds, you may choose to apply for a second mortgage. This is particularly the case if you are unable to refinance your initial home loan thanks to your current lender turning your application down, potentially putting you on track to become a mortgage prisoner.
There are a number of possible reasons to access the equity in your home through a second mortgage, including:
- Undertaking a home renovation project.
- Acting as a guarantor for someone else’s loan.
- Freeing up funds to purchase an investment property.
- Consolidating personal debts.
How to take out a second mortgage
Before taking out a second mortgage, consider speaking to your existing home loan lender about whether refinancing your existing loan is an option worth pursuing.
Given the risky nature of second mortgages, many lenders are hesitant to offer them. For this reason, you may choose to contact a mortgage broker, who may be able to assist you in finding a lender offering a second mortgage option.
The application process for a second mortgage is different from a regular mortgage. Typically you will be required to provide details of your existing loan in addition to your personal and financial details. Eligibility requirements will differ between lenders, therefore it’s important to compare your options and find a loan to best suit your financial position.
Factors to consider when applying for a second mortgage
Financial stress
The most important factor to consider before opting to take out a second mortgage is whether you can actually afford the repayments. Taking on a second mortgage means servicing two loans, which could potentially lead to financial stress should you not be able to meet repayments.
Interest rates
Because 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.
Fees and charges
As mentioned previously, lenders typically view second mortgages as bearing greater risk than a first mortgage. Likewise with interest rates, the fees associated with second mortgages will typically be higher.
It’s important to note if you decide to apply for a second mortgage with another lender, the primary lender of your first mortgage will need to consent to this. If they do agree to this, they will typically charge an administration fee.
Lending criteria
A second lender will also have their own criteria for whether or not you are able to service a second mortgage. This criteria will typically be stricter than a first mortgage because of the risk the lender is having to take on.
Alternatives to a second mortgage
When contemplating whether to take advantage of a second mortgage, the primary alternative is refinancing your current home loan. This overall process of refinancing is simpler when compared to second mortgages, as you have the option of refinancing internally, with your current lender, or externally, with a lender offering different features.
Refinancing will also mean paying off one loan as opposed to two, without the added risk. This means lenders can generally offer competitive interest rates as opposed to second mortgages, helping entice you to switch to them while saving you money in the long-run.
Buying a home or looking to refinance? The table below features home loans with some of the lowest interest rates on the market for owner occupiers.
| Lender | Home Loan | Interest Rate | Comparison Rate* | Monthly Repayment | Repayment type | Rate Type | Offset | Redraw | Ongoing Fees | Upfront Fees | Max LVR | Lump Sum Repayment | Additional Repayments | Split Loan Option | Tags | Features | Link | Compare | Promoted Product | Disclosure |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
6.04% p.a. | 6.06% p.a. | $3,011 | Principal & Interest | Variable | $0 | $530 | 90% | 4.6 Star Customer Ratings |
| Promoted | Disclosure | |||||||||
5.99% p.a. | 5.90% p.a. | $2,995 | Principal & Interest | Variable | $0 | $0 | 80% | Apply in minutes |
| Promoted | Disclosure | |||||||||
6.09% p.a. | 6.11% p.a. | $3,027 | Principal & Interest | Variable | $0 | $250 | 60% |
| Promoted | Disclosure |
First published on June 2022
Image by Mohd Azrn via Unsplash
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