Can you get a second mortgage in Australia?

If you're paying off a home loan and need access to funds for any reason, most Australians might consider refinancing their loans to release any equity held in their properties.

But taking out a second mortgage against a home that's already got a mortgage is another option that may suit some circumstances.

What is a second mortgage?

In simple terms, a second mortgage is one taken out over a property that already has a mortgage on it.

A second mortgage takes its place behind the first mortgage. This means if the borrower runs into trouble making repayments and the property is repossessed and sold, it is the first mortgage that will be repaid first. The lender behind the second mortgage will get what remains and this is why second mortgages are seen as riskier than one-off mortgages.

It's also typical that second mortgages are taken out with a different lender than the first mortgage.

How does a second mortgage work?

A second mortgage can be taken out against the equity built up in a property that is already mortgaged.

In simple terms, equity is the difference between the market value of a property and the current home loan balance.

As an example, say you purchased a home five years ago for $500,000 and had home loan of $450,000, you would have had $50,000 equity in your home.

But in a fast-rising property market, after five years, your home may now be valued at $700,000 and, with a lower loan balance of $400,000, you now have $300,000 equity in your home.

A second mortgage allows you to borrow against that built-up equity for another purpose. It could be to purchase an investment property, do home renovations, or assist a family member to get into the housing market.

A second mortgage is paid off as you would pay off a first mortgage, meaning you would need to make regular repayments on both your home loans.

Does the first mortgage lender know about the second mortgage?

In some cases, your original lender may provide you with a second mortgage, but when a second mortgage application is with a different lender (which is more common), the first lender must consent to the second mortgage being taken out.

Generally, they won't prevent the borrower from taking out a second mortgage - after all, the first lender's loan will take precedence if the property is repossessed down the track. However, they'll usually charge a fee for assessing a second mortgage request.

Why would you take out a second mortgage?

While most Australians might prefer to refinance their home loans to access the equity in their properties, there may be some circumstances where a second mortgage could be considered:

A fixed rate home loan

If you have a fixed-rate home loan, breaking your contract to refinance your loan could be a costly exercise. Depending on your lender, market interest rates, and your home loan contract, the break fees associated with a fixed-rate home loan could see you paying thousands of dollars that may be better directed to a second mortgage. This may only be until your fixed-rate period expires on your first mortgage and you're free to refinance and consolidate both mortgages.

See also: Can you refinance a fixed rate home loan?

Refinance application rejected

You may look to take out a second mortgage after you've approached your current lender, or another lender, about refinancing your home loan and had your application rejected. If this is the case, you would need to carefully consider the risk of taking out a second mortgage, which are generally considered higher risk than refinancing an existing loan.

Being a guarantor

Some homeowners with equity in their homes may consider taking out a second mortgage to guarantee a home loan for a family member. Parents may choose to go down this path to help their children secure a home loan, but this comes with its own risks.

It's strongly advised that anyone considering taking out a second mortgage on their home as security for some else's loan seek legal advice first to fully understand what it entails.

Other reasons for second mortgages

Second mortgages can be taken out for any reason that someone may want to access equity in their home including:

• Home renovations or upgrades

• Releasing funds to buy an investment property

• Consolidating or paying off other debts

• Putting funds into a business

How can you obtain a second mortgage?

The process of obtaining a second mortgage is much the same as applying for a home loan, except more complicated and with more restrictions.

Be aware, some second mortgage lenders may restrict how much equity you can borrow against with a second mortgage. As well, interest rates on second mortgages are likely to be higher than for other home loans offered by the same lender or available on the wider market.

This is because second mortgages are considered higher risk as the lender knows it will be second in line to recoup any losses if the borrower defaults on the loan.

For this reason, lenders are unlikely to offer rate discounts or low application fees as they might on standard home loans.

Which lenders offer second mortgages in Australia?

Some larger banks, including the big four, offer second mortgages, as do some specialist non-bank lenders, but many lenders do not.

You'll need to find a lender who offers second mortgage home loan products and be prepared for a longer loan approval period than for a standard home loan. The application process will be more complex with another lender already holding a mortgage over your property.

Engaging a mortgage broker may assist you in deciding whether a second mortgage is the best option for you and help you navigate the process if you choose that path.

Should I take out a second mortgage or refinance?

It pays to do your research on costs before applying for a second mortgage. In some cases, it may be cheaper to cop the break fees for a fixed rate loan and refinance rather than pay the loan fees and higher interest rates associated with second mortgage products.

Because second mortgages are still relatively uncommon in Australia, the refinancing market is typically far more competitive, regularly offering cashback deals, attractive refinancing interest rates, and low application fee products.

To give you some idea, the table below features some of the most competitive owner occupier refinance products currently on the market:

Important Information and Comparison Rate Warning

Lender processes and procedures for refinancing applications may also be more streamlined. As second mortgages are not as common, some lenders may take an extended time to consider and process your application. If you need quick approval, a second mortgage is unlikely to deliver it.

Make sure you research both options, do your calculations, and consider what best suits your needs before choosing between them.

What to consider before applying for a second mortgage

Can you pay back two home loans?

This is the obvious consideration. A second mortgage means two lots of loan repayments you'll have to come up with every month. This could see you face mortgage stress if your circumstances change down the track.

Interest rates

As we've touched on, the interest rates on second mortgages won't look much like the interest rates you'll see advertised on the wider home loan market. They'll likely be considerably higher, as second mortgages pose far more risk to lenders, and they'll be looking to make up for that in the interest rate they charge you.

Fees and charges

Second mortgage lenders will likely charge you full whack - or higher - on your loan application and establishment fees. As well, the provider of your first mortgage will likely charge you an administration fee for considering a request for a second mortgage.

Lending criteria

Just because you've qualified for a home loan doesn't mean you will qualify for a second mortgage. Lenders have more stringent eligibility criteria for second mortgages, reflecting the higher risk they're taking on. Some may restrict the amount you can borrow and there is likely to be greater scrutiny of your financial affairs and credit history.

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