WHY A SECOND MORTGAGE MAY BE YOUR FIRST CHOICE
In this article, we’ll look at short-term second mortgages – what they are, how they work, how you might use them, their benefits, and what to consider when you are applying for one.
What is a second mortgage?
When you have equity in your property and need access to funds quickly, a short-term second mortgage can be a good option in the absence of not being able to extend or refinance your first mortgage.
A second mortgage is essentially a second loan that’s in addition to the primary (first) mortgage, secured against your property. Also known as a second lien, or secondary registered interest, it uses the equity you have in your property and, once established, means you will have two mortgages against your property.
Traditionally, second mortgages were like first mortgages, in that they were for very long periods of time (sometimes decades). However, in Australia, the rise of non-bank and private lenders has opened up the options for borrowers – in particular, offering short-term second mortgages that typically have a term from two-to-36 months. Short-term second mortgages are an increasingly popular alternative for both personal and business funding requirements.
For mortgage providers, a second mortgage means they are second in line to be paid, after the first mortgage is paid, so their risk is somewhat larger. This can be an important factor in being approved for a second mortgage, and the cost (interest rate) applicable to the loan.
How does a second mortgage work?
A second mortgage is very similar to a first mortgage, in that it is secured against your property. Importantly, mortgage providers will consider the total loan-to-value ratio (LVR) of both the primary and secondary mortgages in evaluating the loan for approval.
Second mortgages tap into the equity that you have in your property. This will increase over time as you make payments and reduce the principal, and/ or with increases in the property value. This additional equity can then be ‘released’ via a second mortgage loan.
You can apply online for a second mortgage with a range of lenders, and once approved, the loan may take the form of a lump sum (one-time loan) or a line of credit (available to be drawn upon as the need arises).
When you may consider a short-term second mortgage
There are a variety of reasons why you might consider a short-term second mortgage to access funds for a limited period. These include:
- Renovations: If you are planning on selling your property, a short-term second mortgage can provide funds to make improvements to your home that can be quickly released upon the sale of the home (i.e. the first and second mortgages are paid out once the property has sold).
- ‘Bridging the gap’: A short-term second mortgage is commonly used to ‘bridge the gap’ between the purchase of one property and the sale of another, when the settlement timings don’t quite match up.
- Investment property: You can access the equity in your property to purchase another property, using a short-term second mortgage to fund the deposit and/ or purchase.
- Debt consolidation: A short-term second mortgage with a lower interest rate is often used to pay off personal loans, credit card debts, or even a large medical or tax bill.
- Business use: Standard business loans typically attract a higher rate of interest than a loan secured by property, so a short-term second mortgage is regularly considered when short-term funds are required to boost business cash flow or working capital (for example, to pay suppliers and wages, purchase stock/ equipment or ‘even out’ invoice lags).
The benefits of second mortgage loans
If you have solid equity in your property, and need access to additional funds relatively quickly for short-term personal or business use, there are a range of benefits to choosing a short-term second mortgage:
- Large loan amount: You can often access large loan amounts with a short-term mortgage as they’re secured by property (which mortgage providers consider the ‘safest’ type of guarantee). The amount you can borrow depends on the amount of equity you have in your property.
- Lower rate of interest: A short-term second mortgage typically has a lower rate of interest in comparison to alternatives such as caveat loans or unsecured personal loans.
- Higher LVR: Short-term second mortgages usually have a higher loan-to-value ratios (LVR), which means you can borrow a larger loan amount.
- Fast access to funds for a variety of uses: A short-term second mortgage loans allow you to access the equity you have built up in your property relatively quickly for personal use (such as renovations to prepare your property for sale), or if you have a time-sensitive business opportunity or requirement (such as purchasing another business or boosting working capital).
What to consider when applying for a short-term second mortgage
While there are many benefits to using a second mortgage for access to short-term funds, there are some important areas that should be investigated before applying for a loan, to include:
- Equity: How much equity you have and what the total LVR will be once you have two mortgages secured against your property.
- Application process: Your first mortgage lender will need to approve the registration of a second mortgage on the title of your property. The application process is a little more complex than for, say, a caveat loan, as the lender needs to value the property and run credit checks. There may also be fees associated with the application process.
- Interest: Adding a significant loan amount to your first mortgage will mean you are paying additional interest.
When you have equity in your property and need access to funds quickly, a short-term second mortgage can be a good option in the absence of not being able to extend or refinance your first mortgage. You can apply online through an increasing number of mortgage providers, including non-bank and private lenders, to access to funds that can be used for a variety of personal or business uses.