Charging a second mortgage over a property that already has a mortgage on it may sound daunting to some, but there are scenarios where this funding approach is strategically favorable.
A second mortgage is a mortgage over property that has a lower rank or position than a first mortgage. A second mortgage loan uses the equity available in your existing property to free up cash. It is generally of lower value than your existing first mortgage and is used for a short period of time.
Second mortgage finance will generally have a higher rate than your existing loan. There is a greater risk in lending against a second mortgage. The second mortgage lender takes a lower priority than the first mortgage lender who is paid first from any proceeds from the sale of the property. The rate reflects this risk to the lender.
For example, assume you have a mortgage for $300,000 secured on your home with Lender A and you apply for a second mortgage of $100,000 on the same home with Lender B. If you couldn’t pay back the loans and the property was then sold for $360,000, Lender A would be repaid in full and Lender B would only receive the remaining amount, leaving them out of pocket.
Typically, a second mortgage loan can utilize a higher loan to valuation (LVR) ratio against the security property. This allows you to unlock a greater portion of your property and provides cash for your finance needs.
Second mortgage finance can be used in a variety of ways for business use:
If your first mortgage is on a fixed rate loan with high exit fees or you just want to keep your great low rate, you may choose to borrow with a second mortgage rather than refinance for your next project.
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