Second Mortgages

The upside of a second mortgage:

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Let’s look at short-term second mortgages – what they are, the benefits of using them and common scenarios where they make sense when you need quick access to funds for up to 12 months.

What is a second mortgage?
It is exactly as it sounds – a second mortgage loan that is secured against your property when you already have a primary loan (or first mortgage). A second mortgage is ranked below the first mortgage so that in the event of a foreclosure, the first mortgage is paid back as a priority (then the second mortgage is paid from the balance of funds). This increases the risk for the second mortgage lender. As such, lending criteria for a second mortgage is often quite strict and there’s typically a fair amount of scrutiny in the application process. To even consider a second mortgage, you need solid equity in your property given the Loan-to-Value (LVR) ratio needs to include the total of both loans to meet the borrowing criteria for second mortgage lenders in Australia.

The benefits of using a short-term second mortgage loan
If you have solid equity in your home, an inability to extend or refinance your primary mortgage loan, and a need for access to significant funds, a short-term second mortgage may be worth considering.

Short-term second mortgages are advantageous compared to other forms of finance such as personal loans and credit cards. For one, a short-term second mortgage allows you to borrow more funds based on the value of the equity in your home. Secondly, because the loan is secured by your property, the interest rates are far lower than alternative sources of funds. There are many second mortgage lenders in Australia, and you can often apply online for fast approval.

Why you might take out a short-term second mortgage
Most people seeking additional funds for a variety of purposes, would first consider refinancing to borrow more with their current (primary) lender. But there are situations where this is not possible, and a short-term second mortgage is a good option to explore.

For businesses, a short-term second mortgage loan can be used to boost working capital or even purchase a business.

Similarly, short-term second mortgages are often considered for personal use. For example, you may have a fixed-rate loan at a very low-interest rate, and it is not worth the exit fees or higher interest rates to refinance. Or sometimes homeowners use a short-term second mortgage loan if they are acting as guarantor for an adult child who is purchasing a home. In this case, the second mortgage provides additional security for the bank.

A short-term second mortgage loan can also be used as a short-term source of funds, such as when you are selling one property and buying another, and the settlement timing doesn’t match up. A short-term second mortgage loan can be used to bridge the gap during the sale and purchase process.

Here are some other scenarios where you may consider a short-term second mortgage loan in Australia, compared to alternative sources of funds:

  • A second mortgage loan can be used to purchase an investment property
  • Consolidating debts (personal loans, credit cards, etc)
  • A short-term second mortgage can help you pay a one-off large personal debt, such as a tax bill
  • Undertaking renovations on your home (which adds value to your home and reduces the risk across both mortgage loans)

Key takeaway
When you need access to funds quickly, and cannot extend or refinance your existing (or first) mortgage, a short-term second mortgage loan can be a good solution. You can apply online for a short-term second mortgage. This form of funding can be used for a short period of time (2 to 36 months) for a variety of purposes.