How does a second mortgage work?

If you're already paying off a mortgage on a property, taking out a second mortgage involves applying for another loan with the same property as security. The second mortgage is ranked behind your first mortgage, which means that if you don't repay your debt and your property is sold, your first mortgage will be repaid before your second. This is one of the reasons why second mortgages are harder to find than traditional mortgages. For example, let's assume you have a mortgage for $200,000 secured on your home with Lender A and you apply for a second mortgage of $200,000 on the same home with Lender B. If you couldn't pay back the loans and the property was then sold for $380,000, Lender A would be repaid in full and Lender B would only receive any amount that was left over. Keep in mind that in order to qualify for a second mortgage, you must seek permission from your existing lender.

Why should I take out a second mortgage?

For the majority of borrowers, refinancing their existing loan with another lender offers a less risky option as it allows them to access a higher amount. However, in certain cases taking out a second mortgage can be beneficial. For example, if you want to access some of the equity in your home but your existing lender has refused your request for a larger loan amount, a second mortgage could be a viable option. This could also be the case if your first mortgage is a fixed rate home loan - not only will you need to worry about expensive exit fees if you refinance, but the fixed rate you have locked in may be substantially better than the current variable rate available. Another common situation where a second mortgage can be helpful is where you are guaranteeing a loan for someone else, such as if you're using your home as security for your child's home loan. In this case, the second mortgage provides added security for the bank, allowing them to recoup their losses in the event that your child defaults on the loan.

Is it difficult to qualify for a second mortgage?

Most Australian lenders are reluctant to approve an application for a second mortgage. This is mainly because second mortgages are seen as a high-risk borrowing option due to the lower priority placed on the second mortgage. With this in mind, the majority of lenders will either place tight limits on the amount you can borrow or simply refuse to offer you a second mortgage altogether. But there are lenders who can help you if you need a second mortgage, so contact a trusted mortgage broker for assistance. If you want to take out a second mortgage, you'll need to get approval from the lender that financed your first mortgage. You'll typically need to pay a fee of a few hundred dollars to get the first lender to assess your request. If you're taking out a second mortgage with the same lender that offered your first mortgage, you may be able to borrow up to 95% LVR (loan to valuation ratio). Meanwhile, borrowers taking out a second mortgage with a different lender may be able to access a loan with up to 85% LVR allowed. If you're self-employed and looking for a low doc loan, you won't be able to get approval for a second mortgage unless you go through a private lender, which is not recommended.

Where can you get a second mortgage?

A second mortgage isn't regularly available through mainstream lenders. Rather, they're usually available through mortgage brokers, solicitors arranging funds through private investors, or through vendor finance.