What are the benefits of a second mortgage?

Last Updated on: 22nd November 2023, 01:02 pm

A second mortgage is one of the most common loans every day Aussies take out. The good news is that there are lots of lenders who provide the second mortgage in Australia. 

In this article, we’ll take a closer look at what a second mortgage loan is, as well as what the benefits are for this type of finance. 

What is a second mortgage exactly?

A second mortgage loan is a secondary loan that is secured against your home or property. Your existing mortgage is the primary loan, also referred to as a ‘first mortgage’, and is ranked higher in importance than a second mortgage on the same property. 

This is vital to note, as, in the case of a foreclosure on the home, repayment of the primary mortgage takes priority over repayment of the second mortgage. There is therefore more risk for the lender of a second mortgage, which usually means a second mortgage has a higher interest rate than a first mortgage. 

In order to be able to apply for a second mortgage, you must have built up some very good equity in your home. People who have only recently started paying back a home loan are not usually yet eligible to successfully apply for a second mortgage. For this reason, it’s important to first determine exactly how much equity is in your home as this will largely dictate how much money you can borrow. 

Let’s now look at some benefits of either a long-term or short-term second mortgage.

Second mortgages: the advantages

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. In addition, second mortgages are renowned for being cheaper, with higher loan-to-value ratios (LVRs) than caveat loans. In real terms, this usually means the amount you can borrow is larger, and more economically priced than caveat loans.

On the rise: short-term second mortgages for home improvements

Renovations or other home improvements, such as a swimming pool, are increasingly common reasons Aussie homeowners decide to take out a second mortgage. It’s really more of an investment, and often a pre-sale strategy, as home improvements or additions typically increase the overall value of the property.

Consider a short-term second mortgage for debt consolidation

If you have a bunch of other debts – such as outstanding balances on several credit cards and maybe even a personal loan – it can put tremendous pressure on you financially when you’re paying off a home loan at the same time. In this scenario, it’s common to use a short-term second mortgage to pay out a; existing high-interest debt, and consolidate debt into a single structure at a lower rate.

Need a deposit for another property?

A short-term second mortgage can also be used as a deposit to purchase another property, including investment properties.

Apply for a second mortgage online

Many Australian lenders who provide short-term second mortgage loans will allow you to apply for the loan online. This is most convenient, as you can do the application any time it suits you, all from the comfort of home.

Along with being able to fill up the loan application online, any supporting documents can also be uploaded with the application form and submitted, so long as you have digital copies of the paperwork in question.

Key takeaway

If you have a decent amount of equity built up in your home and you need extra money, it’s worth considering a short-term second mortgage option to release funds for personal or business use.

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