Seeking a second mortgage?

What is a second mortgage?

As the name suggests, a second mortgage is an additional mortgage on a property you already have mortgaged. The key with a second mortgage is that it’s a loan that does not have first priority in the event that you default. The priority rests with the first mortgage and if anything goes pear-shaped, the first mortgage will be paid out, well…first. Then, if there’s enough left over, the second mortgage will also be paid out. If there’s not, the bank just has to cop it.

As a result, second mortgages are not particularly favoured by lenders, so they can be a bit more expensive and difficult to obtain!

Why a second mortgage?

If you’re looking to increase your overall borrowings, the simplest approach would be to refinance an existing home loan for a higher amount…wouldn’t it? It’s not always that straightforward, says homeloanexperts.com.au senior mortgage broker Matthew Trad.

“Generally, we see clients enquire about a second mortgage when they want to release some extra equity out of their home but their existing financier has declined their request for the increased loan amount. They may then try for a second mortgage,” says Trad.

“The other situation a second mortgage is used in is when a family member is guaranteeing a home purchase; for example, a mother and father providing a parental security guarantee to assist their child in purchasing their first home. In this case, the second mortgage acts as additional security for the bank.”

Pros and cons

Trad says second mortgages can make sense for parents who don’t have ready access to funds but want to provide a security guarantee to help their child or children purchase property.

“Using a parental guarantee, you can avoid paying lenders mortgage insurance (LMI) and also borrow up to 105% of the purchase price if there is sufficient equity.”

A disadvantage, however, is the many hoops you may have to jump through to obtain a second mortgage.

“Taking out a second mortgage can be very time consuming,” says Trad. “Because the banks don’t really like them, they discourage them by making the qualifying criteria very difficult to meet. And because they don’t handle them often, the process of applying for a second mortgage is often quite unfamiliar even to the bank’s own staff. More often than not, we find there are lots of errors and delays that hold up the process.”

“The fees can also be a lot higher than on a first mortgage. Plus, there is usually a fee payable to the lender with the first mortgage and they also have to provide consent for a second mortgage to be taken out.”

Another factor is the LVR (loan-to-value ratio), which tends to be lower for second mortgages.

“Generally with second mortgages we only see lenders agreeing to lend between 60 and 80% of the property’s value across both the first and second mortgages combined. It can be slightly higher if both mortgages are held by the same lender.”

Trad says you can take out a second mortgage with your existing bank, if they are willing, or you may need to go to another institution.

“In the latter scenario, you end up with two separate home loans from two separate banks. The logistics of managing this are obviously not ideal, not to mention the fees for establishing and maintaining two separate loans.”

“Generally speaking, only the bigger banks will be willing to provide a second mortgage behind another bank, so your lender options are also pretty limited.”

Are there alternatives to a second mortgage?

Trad says most of the time it’s more efficient and cost-effective for a customer to refinance their existing loan and increase it for whatever purpose they require.

“The process of refinancing is pretty easy. A good broker can have access to up to 40 lenders, so most of the time there is someone willing to look at any given situation, thus negating the need for a second mortgage.”

Second mortgages might not work for everyone, but if your borrowing options are limited, they are definitely worth a look.