Home loan spotlight: Second mortgages

June 5, 2011

Thinking of taking out a second mortgage? Ask yourself first if you would be better off refinancing and, if you still wish to go ahead, make sure you consider the good the bad and the ugly.

A second mortgage acts as a lien on your house; a legal claim by the bank to secure debt repayment. As with your first mortgage, your second lender registers an encumbrance and interest on the property title, securing their lending against the property asset.

The benefits:

• Provides fast access to funds in an emergency, like when cash flow isn’t meeting expenditure.
• Interest payments on a second mortgage may be tax deductible.
• Some lenders may have funds available for you within 24 to 72 hours from approval.
• You can use the money for any reason you like. Some people use it to pay exorbitant interest debts and reduce their monthly repayments.
• Helpful for those who wish to draw on their equity, are relocating or are unsure of the amount of funds they need.
• Using a second mortgage to help secure your first home mortgage helps avoid having to pay Lenders Mortgage Insurance.

What to look out for:

• Some lenders will only allow you to borrow 80 percent, while others will allow 100 percent.
• Your ability to secure a second mortgage will depend on your credit rating, the amount of the loan, your debt levels, the value of the property and your disposable income.
• If your lender knows you are planning to finance a first mortgage on a property using second mortgage money, your loan application may be denied.

If your lender forecloses on your first mortgage and there are only sufficient funds to cover that loan, the second mortgage lender is not repaid. As a precaution, your second mortgage will most likely incur a higher interest rate.

Related mortgage links

• Fixed Rate Mortgage
• Low Interest Mortgage
• Interest rates will rise
• UHomeLoan (for refinancing)
• Get into your own home sooner
• Compare Home Loans