Second Mortgages

Before you apply for a second mortgage, there are a few things you should know.

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, updated on August 7th, 2023       

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If you’re still paying off your house, but find yourself in need of extra funds, you could consider getting a second mortgage on your house.

How does a second mortgage work?

To get a second mortgage, you need to seek approval from the lender who holds your first mortgage. Once you have approval, you can take out a second home loan, either with the same lender or with a different lender.

If you default on either of your mortgages, your home can be repossessed and sold. The proceeds from the sale will go towards paying off the first mortgage as a priority. If there’s any money left, it will go toward paying off the second mortgage.

Should I get a second mortgage?

There are several reasons that people get second mortgages. Here are just a few:

  • Need a large lump sum –You may need to access a big chunk of money. You can use this to make renovations or repairs to the house or spend it on something else.
  • Need to borrow more – The lender decides how big a loan to give you. Sometimes it may be less money than you wanted. For example, if you were hoping the lender would fund 80% of the value of the house, but they are only offering you 60%, then you may want to approach a second lender to get the missing 20%
  • Want an alternative to breaking a fixed-rate contract – If you’re thinking of borrowing more through refinancing, there are a couple of things you need to watch out for. Firstly, if interest rates have risen, you may not get a deal as good as the one you already have. Secondly, the break costs on a fixed-rate mortgage can add up to thousands of dollars. In these situations, you might find a second mortgage is a cheaper option than refinancing.
  • Guaranteeing a loan – There are several types of guarantor loans. One of these involves the guarantor taking a second mortgage on their home to secure a mortgage for someone else.
  • Investing in a property portfolio – You can use the equity in your property as security for another property. In certain situations, this can be structured as a second mortgage.
  • Consolidating debt – Home loan interest rates are usually cheaper than other loan types, especially credit cards. To save money, you can consolidate your debt onto your home loan using a second mortgage.

How much can I borrow on a second mortgage?

How much you can borrow varies depends on your lender. Lenders usually set a Loan Value Ratio (LVR) which represents what proportion of the property they are willing to loan money for. For example, an LVR of 80% means the lender is willing to lend you 80% of the property value.

When calculating the LVR, they will look at both the mortgages together. For example, if one lender has a 50% stake in your house, the second lender may only be willing to lend you 30% to bring the total LVR up to 80%

LVRs range from 60%-95%. Generally speaking, if you take out a second mortgage with the same lender you used for your first mortgage, they are likely to lend you more than if you use a different lender.

What does a second mortgage cost?

If you’re planning to take on a second mortgage, you’ll probably need to pay extra fees on both mortgages:

First mortgage fees

When you approach your lender to get permission to take on a second mortgage, they may charge you a fee. They will assess your financial position, and the process can cost a few hundred dollars in admin fees.

Second mortgage fees

Because they’re taking on extra risk, lenders charge higher interest rates and fees for second mortgages than they would for a first mortgage.

How do I apply for a second mortgage?

Remember to get approval from your current lender first. Once you have that, you can put in an application for a second mortgage.

The documents you’ll need are pretty much the same as the ones you used for the first mortgage. They include ID, proof of income and details of your assets and liabilities.

Because your first home loan is a liability, you’ll need to include all the details in the application.

Top Tip: Always crunch the number before you apply. How much debt can you afford to take on? Will you be able to meet repayments on both loans?

Frequently asked questions about second mortgages

Can I get a second mortgage if I’m self-employed?

Yes. It will be much easier under a Full-Doc basis, Low-doc loans however are risky for lenders, and many lenders will not look at a second mortgage for a self employed customer that does not have 2 years worth of tax returns.

Is a second mortgage like a line of credit?

No. A line of credit allows you to draw out small amounts over time. You only pay interest on the amount you’ve used. (Similar to how a credit card works.)

A second mortgage, on the other hand, loans you money as one lump sum. You start paying interest from day one.

Can I get a second mortgage on an investment property?

You can, but you may find your options limited. There aren’t many lenders who deal in second mortgages and even fewer who allow second mortgages on investment properties. However, there are other products you can use to access the equity in your investment property.

Is a second mortgage more expensive than a personal loan?

Even though your second mortgage will cost more than the first, it’s still likely to be cheaper than a personal loan or a credit card. Apart from that, these mortgages are usually for much higher amounts than what is readily available on credit card or personal loan products.

I’m struggling to pay my mortgage. Can a second mortgage help me?

No. If you take out a second mortgage, you will then have two loans and two sets of repayments, which is probably going to make your financial situation worse. Lenders know this and are unlikely to approve you for a second mortgage at all.

If you are struggling to pay off your home loan, talk to your lender about putting financial hardship measures in place until you get back on your feet.

Can I get a second mortgage with an interest-only period?

It’s highly unlikely that you’ll find a lender willing to approve this.

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