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Solving problems with a second mortgage

Need short-term finance? A second mortgage could help.

Life is full of ups and downs – and your finances are no different. When your circumstances change and you need access to cash, a second mortgage could be the best option for you. This type of loan can help you get over all sorts of financial hurdles – funding a new business, paying off debt, purchasing a new property or renovating an old one.

A second mortgage is – usually – a smaller loan on top of your original home loan. Because they’re based on the value of your existing property, it’s easier to get one if you’ve built up some equity over time. Unlike primary mortgages, they’re usually short-term – not 25 or 30 years – as they’re used to achieve a specific financial goal or get over a rough patch.

Why take on a second mortgage

Second mortgages are usually taken out for a specific purpose – not just because you need extra income. Although interest rates on second mortgages are often higher than standard home loan rates, they still beat credit cards or personal loans.

The most common reasons for second mortgages include:

  • Clearing up debt – if you have several small debts, it can make sense to take out a second mortgage to cover them. Rather than dealing with multiple lenders, interest rates, and lending terms, you only have to manage a single loan.
  • Financing a business – keen to start a new business, but waiting on finance approval from the bank? A second mortgage can be a simple way to get you through the first 6-12 months of trading.
  • Renovations – renovating your home or rental property can be expensive. A second mortgage can be an efficient, lower-interest way to fund building work.
  • A significant purchase – it’s less common, but some people take out a second mortgage to fund a large, one-off purchase, like a car or boat. Of course, using a second mortgage for this purpose only makes sense if you know you can pay off the balance reasonably quickly.
  • Buying an investment property – raising the funds to purchase an investment property is probably the most common reason for taking out a second mortgage. Because interest rates are higher than that of a traditional home loan, many people use a second mortgage as a short-term solution while they wait for other funding, or renovate and on-sell a property.

Risks and requirements

Second mortgages are based on the equity you have in your existing property, so if you’ve been paying down your mortgage for a few years, you’re more likely to qualify.

Equity is the difference between the current value of your property and what you owe on your home loan. If your property is worth $900,000 and you owe the bank $400,000, you have $500,000 in equity. More equity means less risk for lenders because they know they’ll get their money back if things go wrong.

Although some banks offer second mortgages, it’s often easier to get them through non-traditional or non bank mortgage. This type of lender often has less stringent lending requirements and lower interest rates for second mortgages. If you get a second mortgage through a separate lender, your first mortgage is unaffected – you simply have to make regular payments on each loan.

Applying for a second mortgage is much like applying for a regular home loan – you have to fill in forms, provide evidence of your income and budget, and possibly have a chat with a loan manager. Because this type of loan is based on the equity in your home, you will usually need to provide a registered valuation as well.

Does a second mortgage make sense?

Of course, as with any loan, there are risks to taking out a second mortgage. Higher interest rates mean higher repayments, and because they’re secured against your property you risk losing your house if things go wrong. If you’re not completely confident that you’ll be able to pay off the balance in a reasonably short time, it’s probably not worth the risk.

Talk to an expert

If you’re thinking about taking out a second mortgage, it’s vital to talk through your financial situation with a professional financial adviser before you sign anything. You’ll get help to work out whether you qualify, how much you can borrow, and if it’s smart to take out a second mortgage at all. A good adviser can also find a good range of lenders and rates for your situation.

Need a way over a financial hurdle? Talk to the team at Global Finance about your second mortgage options.