How do second mortgages work?
A 2nd mortgage ranks behind a 1st mortgage in terms of repayment priority.
If the property is sold while there is still money owing on it, the 1st mortgage is paid out from the sales proceeds before the 2nd one is repaid.
It’s important to understand that you don’t have to get a 2nd mortgage with the same lender that provided you with your 1st one.
Is a second mortgage a good option for you?
A second mortgage can be a good option if you’re in one of the following situations:
✅ You’re a builder/developer and you require cash for a project.
✅ If you have equity in a property and you need cash for business purposes. eg. Buying inventory, paying ATO debts, starting a business, etc.
✅ You have a fixed rate home loan as your 1st mortgage and there are high exit fees that make refinancing it impractical.
✅ Your fixed rate mortgage is at an interest rate that’s lower than the current variable rates and you don’t want to refinance (and lose) that low fixed rate.
✅ To be a guarantor on a home loan for your children.
How much can I borrow with a second mortgage?
The amount you can borrow for a second mortgage depends on the lender, but in general, the loan-to-value ratio (LVR) will be lower than you can get for a first mortgage.
The LVR is the amount of the loan expressed as a percentage of the value of the property. For example, if you have a property worth $800,000 and you want to take out a second mortgage of $600,000, your LVR would be 75% (which is calculated by dividing $600,000 by $800,000).
In general, you’ll be able to get more funds for a second mortgage if you have built up equity in a property. That can happen by either:
1) The value of your property has increased over time since you took out your first mortgage.
2) You have repaid a significant amount of your first mortgage.
What are the pros and cons of second mortgages?
✅ Fast and easy to obtain as you do not have to go through major banks. Can be paid in a matter of days, instead of weeks or months.
✅ Private lenders usually provide much better and more personalised service compared to banks.
✅ Bad credit is OK when dealing with private lenders.
✅ 100% legal and secure when dealing with a private lender like DFS (all documents are drawn up and processed by a specialist third-party law firm).
✅ Can be repaid early so that they are removed from your property.
❌ Interest rates are higher than first mortgages as the lender has increased risk compared to a first mortgage.
❌ Can be difficult to obtain an approval for a second mortgage with a bank, especially if you have minimal equity in your home or you have a bad credit score (also known as a credit rating).
❌ Second mortgages from major banks can take weeks or months to process.
Why are the banks so conservative with second mortgages in Australia?
Banks are traditionally very conservative institutions. They are even more conservative after the recent Financial Services Royal Commission exposed many concerns over their lending practices. They have tightened their lending criteria accordingly, making it harder to get second mortgages approved.
The economic downturn caused by COVID-19 is likely to make the bank lending environment in Australia even tougher. Banks are more risk-averse than ever before, and second mortgages are a riskier option for them than a first mortgage.
If a second mortgage holder defaults on their loan repayments, the lender may only be partially repaid from the sales proceeds of the property (or they may not be paid at all).
How do you get a short-term second mortgage?
Private lending is an common alternative for those seeking a second mortgage compared to obtaining it from a bank. With private lending, you borrow funds from a non-bank third party via a contractual agreement. The third party could be a private individual or firm.
Both borrowers and lenders must adhere to the terms and conditions set out in the private loan contract, including repayment schedules and interest charges.
Private lending is legal and it is the fastest growing sector of the Australian lending market.
Applying for a loan through a private second mortgage lender is an option worth considering because you’ll have a better chance of the finance being approved. It is faster than going through a bank, and private lenders do not require as much documentation as banks.
You can apply for a private loan even if you have minimal equity in your home or you have a bad credit rating.
How do I find a private lender?
At DFS, we are private lending specialists who can match you with a private lender who is suited to your needs.
We have a pool of private lenders.
Whether you need 2nd mortgage funds as a borrower or guarantor, we can arrange fast approvals and settlement with minimal documentation.
How do you get a 2nd mortgage with bad credit?
Having a bad credit history can make it very difficult to get a second mortgage with a bank. However, a private lender will be more likely to look at your current and future prospects, rather than looking at your past.
Second mortgage loans for bad credit applicants are available from private lenders if you want to capitalise on a good business opportunity.
At DFS, we don’t conduct credit checks as part of your private loan application.
Are second mortgage loans different from caveat loans?
A caveat loan is secured against the equity you have in your property. Once a caveat is in place, the property can’t be used as security for any other form of finance.
A 2nd mortgage on a property on the other hand registers a second interest in the title of a property that’s already been secured by a lender.
Is it better to refinance than to get a second mortgage?
This depends on your individual situation.
However, you will find it difficult to refinance with a bank if you have minimal equity and/or a bad credit rating. In addition, if you do have a bad credit rating and your refinancing application is declined, this further harms your credit score. It can be a difficult cycle to break. Private lending is an alternative to help you to do that.
Case study – second mortgage loan for property development
One of our DFS clients is a property developer who recently bought a multi-residential development site in Sydney. He obtained funding for the land purchase through a bank. However, soon after purchasing the site, the area was rezoned to enable commercial developments as well. The developer saw an opportunity to incorporate a ground floor retail component as part of the multi-residential apartment complex that he had originally envisioned.
This bold new plan would make the future development even more valuable. However, it would also require additional early funding, which was something that his bank was unwilling to approve because the additional funds didn’t fall within their strict lending criteria.
Not wanting to miss out on the opportunity, the developer contacted us at DFS. We put him in touch with a private lender who could see the potential of his plans for the development site. They came to a second mortgage loan arrangement on one of the developer’s existing properties.
The development is now underway and on track to become a high-demand complex for people who want the convenience of onsite retail shops beneath their swanky new apartments!