A second mortgage is a loan term you hear quite often in Australia. It’s a common finance choice when people have solid equity in their home and need access to significant funds in the absence of being able to extend or refinance their first mortgage.
Second mortgages were traditionally only available through banks. Though now, the lending landscape has changed significantly and second mortgages are now readily available through a variety of providers, including the private lenders (who have their own funds, which means they usually make quick decisions and offer flexible solutions).
In this article, we’ll take a closer look at what a second mortgage loan actually is, why they can be advantageous, and what to consider when applying for this type of finance.
Second mortgages explained
The name of the loan is exactly as it suggests: it means taking out a second mortgage in addition to your first mortgage, which is secured against the equity of your home. As such, your home’s equity will dictate the amount you can apply for. When considering a second mortgage, you need solid equity in your property given the Loan-to-Value (LVR) ratio needs to include the total of both loans.
When it comes to loan priorities, a second mortgage is ranked lower than the initial mortgage, so in the event of any foreclosure, the primary mortgage is taken care of first. A second mortgage will only be paid back after the first mortgage has been cleared.
In terms of the mechanics, second mortgages post more risk for the lender, so they can be tougher to get than a home loan. This is because, when it comes to loan priorities, a second mortgage is ranked ‘lower’ than a first mortgage. So – in real terms, should you be in the unfortunate situation where you default on your mortgage and foreclosure occurs, the lender from your first mortgage will be paid back as the priority. A second mortgage will only be paid back after the first mortgage has been cleared.
As such, the lending criteria for a second mortgage is often quite strict and there’s typically a fair amount of scrutiny in the application process.
When to consider a second mortgage loan
Traditionally, second mortgages had quite a long term – even decades. However, with the rise of private lenders, borrowers can now access short-term second mortgages, which typically go for 2 – 36 months.
A short-term second mortgage is an appealing alternative when borrowers have solid equity in their home but are unable to extend or refinance their first mortgage. In this instance, a short-term second mortgage enables borrowers to quickly access significant funds.
Short-term second mortgages are advantageous compared to other forms of finance such as personal loans and credit cards. For one, a short-term second mortgage allows you to borrow more funds based on the value of the equity in your home. Secondly, because the loan is secured by your property, the interest rates are far lower than alternative sources of funds.
Borrowers seek short-term second mortgages for a variety of purposes.
Short-term second mortgages are often used to ‘bridge the gap’ when you are selling one property and buying another and the settlement timing doesn’t match up. Similarly, a common reason that Australians take out a short-term second mortgage is for home renovations and general home improvements – particularly right before selling their home to help optimise the sale price.
In addition, a short-term second mortgage loan can also be used to purchase an investment property, consolidating debts (personal loans, credit cards, etc), or pay a one-off large bill, such as tax. For businesses, a short-term second mortgage loan can be used to boost working capital or even purchase a business.
Choosing a short-term second mortgage lender in Australia
When you need access to funds quickly, and cannot extend or refinance your existing (or first) mortgage, a short-term second mortgage loan can be a good solution. This form of funding can be used for a short period of time (2 to 36 months) for a variety of purposes. Short-term second mortgages are provided by many Australian lenders – so there’s plenty of choices: and you can often apply online, which often makes the process easier.
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