When to Get a Second Mortgage
A second mortgage is a secured loan that acts as subordinate to a different loan against the same property (a traditional mortgage). The reason that second mortgages are considered subordinate is that if the borrower is unable to make repayments and so goes into default, the first loan/mortgage is the one that gets paid off first. This means that second mortgages are much more risky for the lender than first mortgages.
For this reason banks are usually unwilling to provide second mortgages to borrowers, which is where private lenders come into play. Here at Easy Settle Finance we understand that you may need to take out a second mortgage for various reasons, and we offer funding terms of up to 70-75% of the Loan to Value Ratio (LVR) of your property.
So what are some of the reasons you may need a second mortgage?
- Pre-sale renovations – If you are planning on selling your property in the near future, it is sometimes worthwhile to take out a second mortgage for renovation funds. For example, if you have a property that is currently worth $780,000 but you made $20,000 worth of renovations, it could then be worth more than $900,000. The renovations would help to boost the value of the property. However, if the same property would only be worth $800,000 after the $20,000 of renovations had been done, it would not be worth it as you would not be covering the costs of your time, the interest and the finance fees, as well as the loan itself.
This is also particularly good as it would be a short term loan of a reasonably small amount of money in the scheme of things, which will lower the amount of interest that needs to be paid over the lifetime of the loan.
- General home improvements/renovations – Even if you are not planning on selling in the near future, second mortgages can also be used to make changes to your home when you don’t have the necessary funds available. It is important that you keep in consideration whether or not the renovations you are making will add value to your home, as if it doesn’t it can be better to wait until you have the ready funds instead of subjecting yourself to further interest rates and repayments.
- Guarantor support – With first home buyers currently having difficulties successfully entering the property market, some parents help their children by guaranteeing their home loan with a second mortgage on their own property. If you are thinking of going down this path with your own children, ensure that all parties involved are informed and aware of all possible outcomes and necessary actions on everyone’s part.
- Emergencies – Sometimes you will need ready funds for things such as medical emergencies or sudden financial reversals. In these cases, if you have a reasonable amount of equity already built up from your first mortgage then it can be worth getting a second mortgage of enough money to tide you over until you have found your financial footing once more.
To find out more about whether a second mortgage is right for you and your circumstances, we advise that you get in touch with one of our financial experts. They will be able to accurately assess your circumstances and will provide you with the necessary advice to ensure that you make the best decision.