Can you have two home loans on one property?

It’s possible to take out two home loans on one property, depending on how much equity you have available. A second mortgage can offer advantages to certain borrowers, but also comes with its share of risks to be aware of.

How does a second mortgage work?

If you want to use one property as security for two mortgages, you’ll need to check that you have enough equity available to secure these loans.

Home equity is the difference between the current market value of your home and the outstanding mortgage. Your equity in a property plays a similar role to the deposit when applying for your first home loan, as it helps to determine your Loan to Value Ratio (LVR).

When applying for a second mortgage, many lenders will only allow you to access your usable equity, which is where you maintain an 80% LVR in your property to avoid having to shell out for Lenders Mortgage Insurance (LMI). 

For example, if you bought a home currently valued at $500,000 and you still owe $100,000 on the mortgage, you’ll have $400,000 in equity, and an effective LVR of 20%.

If you were to apply for a second mortgage, the lender would require you to keep 20% of the property’s value ($100,000) in the home, leaving you with $300,000 of usable equity to work with. 

How can a second mortgage be used?

Some of the potential uses for a second mortgage include:

• Purchasing a second property
• Consolidating other debts
• Becoming a guarantor for a relative’s home loan
• Accessing a line of credit e.g. to repair or renovate a property, setting up a business

Advantages of a second mortgage

A second mortgage could help you to access the money needed for a wide range of purposes. Unlocking the value of your equity could offer the flexibility to complete personal projects and meet your financial goals.

Taking out a second mortgage could be an alternative to refinancing your current mortgage, as you may be able to avoid paying fees from refinancing, such as break fees from a fixed rate home loan or paying LMI twice. 

Risks of a second mortgage

A second mortgage increases your total debt that needs to be repaid, so it’s important to make some calculations to ensure you can afford the additional repayments.

Managing two loans, especially if obtained from different lenders, may be complicated and cumbersome. Also, approval from your existing lender is required, and your lender may charge some fees to assess your request for approval.

Lenders tend to have stringent second home loan requirements and be conservative in approving second mortgages as it increases the risk of default. For example, financial institutions may require a lower loan-to-value ratio (LVR) on a second mortgage, ranging between 60% and 80% of the property value. Lenders may also charge higher interest rates and fees on second home loans because the risks are higher for them.

Also, it’s important to note that mortgages on a property are ranked in order, so the first mortgage takes precedence over the second. If you sell your property, the outstanding balance on the first loan must be fully repaid before any remaining funds can be used to repay the second mortgage. This could risk finding yourself in a difficult financial position if you’re unlucky or careless.

Should you take out a second mortgage?

Taking out a second mortgage on a property can provide advantages under the right circumstances. But because of the complexity and risks involved, it’s important to make some calculations and consider your options before making an application.

An alternative to applying for a second mortgage is to refinance your existing home loan. If you have equity available in your property, you may be eligible to borrow more money (also known as cash-out refinancing), pay a lower interest rate, or both. This could offer the financial flexibility you need to achieve your goals. 

A home loan expert like a mortgage broker or a financial advice may be able to offer more personalised guidance on if a second mortgage may be right for you.

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