What are second mortgages?

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on June 16, 2022 Fact Checked
What are second mortgages?

If you have a mortgage, it’s possible to take out a second one on the same property. Let’s try to explain how.

What is a second mortgage?

A second mortgage is when you borrow money a second time, with your property acting as security for the loan.

You still have to meet regular repayments for a second mortgage, however the first mortgage still takes precedence - if you can't repay your loans, and you have to sell the property, the first loan gets paid out first.

This means the second mortgage is riskier for the lender and thus they can be harder to acquire as a borrower.

You most likely will have to get a second mortgage through a different lender, and it may have higher interest rates or fees as assurance for the additional risk the lender is taking.

Why take out a second mortgage

For most borrowers, refinancing your existing loan with a new lender offers a safer option as it allows you to borrow more.

Taking out a second mortgage is typically used to free up cash, usually in situations where refinancing your current mortgage is difficult.

For example, borrowers who have a fixed rate home loan may face hefty fees if they break their mortgage by refinancing their home loan.

Another scenario would be if a borrower has built up equity in their property and wishes to use this equity in their home to purchase another investment property, but cannot refinance their first mortgage.

Reasons someone may take out a second mortgage:

  • Freeing up cash for a renovation

  • Parents acting as guarantor for children's home loan

  • Accessing equity to buy an investment property.

Case study

Mort Gage has a mortgage on a loan of $300,000 with his first lender. He then takes out a second mortgage of $300,000 with a second lender.

His house is security on both loans.

Mort is unable to make the repayments on his mortgages and ends up defaulting, meaning the first lender has the right to sell his home.

The home is sold for $360,000. This means the first lender is repaid first. The $300,000 loan is repaid to the first lender, with the remaining $60,000 being paid to the second lender.

This means the second lender has received only a portion of the mortgage, demonstrating why lenders are hesitant to allow borrowers to take out a second mortgage as there is more risk involved.

How to take out a second mortgage

When considering a second mortgage, it may be better to refinance your current home loan before contacting lenders about a second mortgage.

Because second mortgages have a high risk for lenders, they are harder to get. If you do take out a second mortgage, you may face higher fees because of the extra risk the lender is taking.

Contacting a mortgage broker may help you find a second mortgage. You could also contact a new lender to find out what second mortgage products they offer.

What to consider when applying for a second mortgage

Financial stress

The most important thing to consider when taking out a second mortgage is whether you can actually afford the repayments. Taking on a second mortgage means servicing two loans, which could potentially lead to financial stress.

Interest rates

Because second mortgages are riskier for lenders, the interest rate they charge will likely be higher than your current home loan.

When comparing, always look at the interest rate you will be charged for your second mortgage, as well as any additional fees.

Additional fees from first lender

If you decide to apply for a second mortgage with another lender, your first lender can charge you an added fee. They also need to be informed of your application for a second mortgage.

Lending criteria

A second lender will also have their own criteria for whether or not you are financially able to service a second mortgage. This criteria typically will be stricter than a first mortgage because of the risk the lender is taking.


Buying a home or looking to refinance? The table below features home loans with some of the lowest interest rates on the market for owner occupiers.

Lender

Variable
More details
  • Min 30% deposit
  • No monthly or ongoing fees, add 0.10% for offset
  • Unlimited redraws

Variable Home Loan (LVR < 70%)

  • Min 30% deposit
  • No monthly or ongoing fees, add 0.10% for offset
  • Unlimited redraws
Variable
More details
REFINANCE ONLY
  • A low-rate variable home loan from a 100% online lender. Backed by the Commonwealth Bank.
REFINANCE ONLY

Variable Rate Home Loan – Refinance Only

  • A low-rate variable home loan from a 100% online lender. Backed by the Commonwealth Bank.
Variable
More details
AN EASY DIGITAL APPLICATION
  • No ongoing fees - None!
  • Unlimited additional repayments
  • Easy online application, find out if you're approved quick!
  • Redraw- Access your additional payments if you need them
  • Use the app to get loan insights to help you pay off your home loan faster
AN EASY DIGITAL APPLICATION

Neat Variable Home Loan (Principal and Interest) (LVR < 60%)

  • No ongoing fees - None!
  • Unlimited additional repayments
  • Easy online application, find out if you're approved quick!
  • Redraw- Access your additional payments if you need them
  • Use the app to get loan insights to help you pay off your home loan faster
Variable
More details
NO ONGOING FEES
  • No ongoing fees - None!
  • Unlimited additional repayments
  • Easy online application, find out if you're approved quick!
  • Redraw- Access your additional payments if you need them
  • Use the app to get loan insights to help you pay off your home loan faster
NO ONGOING FEES

Yard PAYG Home Loan (Principal and Interest) LVR ≤ 80%

  • No ongoing fees - None!
  • Unlimited additional repayments
  • Easy online application, find out if you're approved quick!
  • Redraw- Access your additional payments if you need them
  • Use the app to get loan insights to help you pay off your home loan faster

Base criteria of: a $400,000 loan amount, variable, fixed, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. However, the ‘Compare Home Loans’ table allows for calculations to be made on variables as selected and input by the user. All products will list the LVR with the product and rate which are clearly published on the Product Provider’s web site. Monthly repayments, once the base criteria are altered by the user, will be based on the selected products’ advertised rates and determined by the loan amount, repayment type, loan term and LVR as input by the user/you. *The Comparison rate is based on a $150,000 loan over 25 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. Rates correct as of August 11, 2022. View disclaimer.


Image by Mohd Azrn via Unsplash



Disclaimers

The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered. Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site. Savings.com.au, yourmortgage.com.au, yourinvestmentpropertymag.com.au, and Performance Drive are part of the Savings Media group. In the interests of full disclosure, the Savings Media Group are associated with the Firstmac Group. To read about how Savings Media Group manages potential conflicts of interest, along with how we get paid, please visit the web site links at the bottom of this page.

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Aaron joined Savings.com.au in 2021. He is a finance journalist with a keen interest in property, the share market, and improving financial literacy in young Australians.

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