Second mortgages: basics, pros & cons

Have you ever heard a character in a TV show say they would have to take out a second mortgage to buy that car, take that holiday or repair the damage their kid did to the neighbour’s new caravan? So, what is a second mortgage, how does a second mortgage work and should you even think about getting one if you hit a financial sticky patch?

Quite literally, a second mortgage is just that: a second securing document registered against a property or another asset. Second mortgages are more common where there are two loans with different lenders, unlike refinancing where you are able to borrow more money by accessing the equity in your property.

Some people refer to second mortgages but really mean refinancing so it’s important to know the difference.

For example, if you were to borrow to buy a home secured by a mortgage from Lender A, then borrowed more money from a different lender – Lender B - to buy a business, you may have a second mortgage registered over your property in favour of Lender B. In this case, if you were to default on your repayments, both mortgagors (Lender A and Lender B) could take possession of your property and sell it.

The sales funds would firstly be used by Lender A to payout the home loan and any associated costs. If any funds remain, Lender B could then use these to payout the business loan and any associated costs incurred. Essentially, the first mortgagor goes first while the second mortgagor has to wait until the first mortgage is paid out. In addition, a first mortgagor has to consent to the second mortgage before the second mortgage can be registered.

Given the above, it’s understandable that very few lenders would want to be a second mortgagor.

A second mortgage may be a last resort for people who want to release some equity from their home but have been declined for an increased loan amount by their current lender.

A second mortgage may also be used when a parent is guaranteeing a loan in order to assist an adult child to buy their first home, acting as additional security for the bank.

In most cases, borrowers with existing mortgages will seek any additional loans from their existing lender, however taking a second mortgage can be an option for any of the following situations:

• Paying an ATO debt
• Assisting with business cash flow
• Renovating a home or investment property
• Bridging finance
• Purchasing an investment property
• Starting a business
• Consolidating debts

Getting a second mortgage from a bank can be a long, complex and expensive process and the qualifying criteria can be very difficult to meet, so it is important to check all of your options to find the solution best for your situation.

Additional costs associated with second mortgages can include higher interest rates, first mortgagor fees and government costs such as mortgage registration, etc. Lenders may also agree to lend a combined lower percentage of the property’s value across both mortgages combined.

Seeking an additional loan or an increase to your existing loan with your current lender is a simpler and less complicated option than a second mortgage. However, if your options are severely limited a second mortgage could be worth considering. It’s advisable, however, to seek advice and guidance from an experienced mortgage broker before making a decision.

Whatever you decide, consider taking our home loan protection insurance to protect your ability to meet your loan repayments in the event of serious illness, accident or job loss. Your mortgage broker may be able to organise this for you and provide you with further details on just how easy and affordable it can be.

Loan Protection Plan is jointly issued by Hannover Life Re of Australasia Ltd ABN 37 062 395 484 (Death, Terminal Illness, Living and Accidental Injury Benefits) and QBE Insurance (Australia) Limited ABN 78 003 191 035 AFSL 239545 (Involuntary Unemployment Benefit). It is distributed by Australian Life Insurance Distribution Pty Ltd ABN 31 103 157 811 AFSG 226403 (ALI). ALI receives commission for each policy sold. Any advice provided is of a general nature only and does not take into consideration your personal objectives, financial situation or needs. You should consider the Product Disclosure Statement when deciding if this product is appropriate for you.