Most Australian homeowners purchase a home by taking out a mortgage. Some even take out a second mortgage on the same property if the need arises. There are multiple reasons you’d take out a second mortgage, such as consolidating debts, renovating or repairing your home, or accessing your property’s equity for other purposes.
However, you may find it challenging to manage repayments of both mortgages. If one of the loans’ interest rates is much higher than what you’d like to be paying, combining your first and second mortgage may allow you to save on interest? It may also be inconvenient to deal with two loans with different repayment dates, so it may be simpler to have just one loan.
These are just some of the reasons you may want to consider consolidating your first and second mortgage.
Can I get a better interest rate?
The primary reason for wanting to refinance the 1st and 2nd mortgage into one loan is that you may be able to get a better interest rate than one, or possibly, both the mortgages. You’ll need to check the best rate offered by various lenders who are willing to offer you a loan and confirm that you can save money.
You may find that lenders expect you to pay a higher rate than standard home loans. This is because your second mortgage is considered a ‘cash-out’ loan, meaning that you used the equity in your property to pay for something other than the house itself. Cash-out loans are seen as a higher risk to lenders, so they may charge you a higher interest rate to take yours over.
What else should I look for when combining mortgages?
It’s far more convenient to deal with just one loan account. You don’t need to track two lenders, two loan balances, and different repayment schedules. But there are some other aspects that you need to think about as well.
Ask about all the costs related to your current mortgage and the new one after refinancing; not just interest costs but fees and charges. Consolidating the two mortgages should give you real savings after considering all costs. Don't base your decision on a lower monthly repayment amount only; consider all costs over the loan’s entire duration.
If your credit rating has been affected by any payment delays or defaults, lenders will likely charge higher interest rates, so it may not be the best time to initiate debt consolidation. You may want to manage your current loans’ repayments and improve your credit score before attempting to combine your first and second mortgage.
Once you decide to refinance your first and second mortgages into one loan, you’ll find this rather more complex than a regular home loan application. It’s best to speak with multiple lenders and compare their terms. Be wary of dubious lenders who seem to make things easy but charge high interest and fees. Consulting a mortgage broker will help break through the complexity and help you structure the new arrangement to help you get the best terms.