If you’ve ever heard the term ‘second mortgage’ and wondered what it is, you’re not alone. Read on to find out everything you need to know about second mortgages, including potential reasons to get one, how they work and the major alternative option available.
What is a second mortgage?
A second mortgage is a mortgage that’s taken out on top of a first mortgage. A mortgage is jargon for a home loan. So, a second mortgage is a second home loan on the same property. It is usually taken out with a separate lender to the first home loan. It involves borrowing against the equity (ownership) that you build up in your home over time. Your equity in your home can increase in two ways:
- by your home loan repayments reducing the amount you owe on your home loan.
- by your home increasing in value.
Reasons to take out a second mortgage
Reasons that borrowers take out a second mortgage include:
- a deposit for buying an investment property.
- doing home renovations.
- helping a family member to buy a home by becoming a guarantor.
- to consolidate other high interest debts (like credit cards and personal loans).
How does a second mortgage work?
A second mortgage works in much the same way as a first mortgage. You need to make regular repayments. You obviously need to be able to afford these extra repayments. Standard repayments are monthly, but you may be able to arrange fortnightly or weekly repayments if you prefer.
What is the alternative to a second mortgage?
The main alternative to a second mortgage is refinancing with your first mortgage lender. This is usually a preferable option because interest rates and fees are usually higher on a second mortgage. That’s because there is more risk to the second mortgage lender. If you don’t make your home loan repayments on your first mortgage, the lender can repossess and sell your home. A second mortgage lender can’t do that. They may have stricter approval criteria as a result.
It’s also important to understand that your first mortgage lender will need to agree to you taking out a second mortgage. They may charge a fee for this approval.
Refinancing is usually less complicated than taking out a second mortgage. That’s because one repayment will cover all your home loan repayment commitments rather than two.
It’s worthwhile talking to a mortgage broker to explore your refinancing and second mortgage options before you make a decision.
If you need additional funds, our experienced and licensed mortgage brokers Newcastle at Wisebuy Investment Group can help you to find the right home or investment property finance for your needs. We can also help you with your application. We service a diverse range of clients in Newcastle, Lake Macquarie and Maitland, and we work with more than 60 lenders in the Australian market.
Contact us today for an obligation-free chat! We’d love to hear from you and we’d be happy to answer any questions you have.