Are you seeking extra funding while your first mortgage is still in place? Many traditional lenders like banks hardly lend you money in such a scenario. However, you still have the option of private lending.
Table of Contents
This blog post includes a comprehensive guide to second mortgage private loans to help you make informed decisions while securing funds on your home equity. Let’s dive in to learn more.
Understanding the Second Mortgage Private Loans
The second mortgage private loan is the money you lend on the same property as collateral on which you pay the first mortgage. Where banks and other traditional lenders refuse to lend you more money while you still owe them the instalments from the 1st loan, private lending will still lend you based on your home equity.
Home equity is the difference between the current market value of your property and the remaining amount you still owe from your first mortgage. The private lender provides you with a lump sum up amount on your home equity after the approval of the loan.
Such loans can pay off secondary expenditures like renovations or an entrepreneurial setup. However, there are a few limitations and setbacks on the secondary mortgage.
The interest rate on a second mortgage is too high. Moreover, you can only have a significantly lower amount on your home's equity than the amount you got in the first mortgage.
Further, the property is sold if you cannot pay off both loans. That amount is used to pay the loan from the first lender, and the remaining amount goes to the second mortgage from the private lending company.
Features of a Second Mortgage
To better understand second mortgages for Australians, here are the salient features you must know before applying for one.
- Maintaining at least 20% equity is a requisite for private lending. Hence, you can claim your loans on only an 80% loan-to-value (LVR) ratio. This value is combined for both 1st and second mortgage.
- Since this loan is paid second to the 1st mortgage in the case of default, they are considered riskier for the lenders. Therefore, the interest rate of a second mortgage is higher.
- As the 1st mortgage takes up a significant proportion of the recommended LVR, the customers can only demand a smaller value. Eventually, the repayment terms are also small (mostly up to 1 year).
- Due to the associated risks, private lending companies have strict eligibility criteria for a second mortgage. You must check your eligibility before applying.
Eligibility Criteria for a Second Mortgage Private Loan
The eligibility requirements differ for each lender. However, here are some minimum requirements you must meet before looking for a second mortgage private loan in Australia.
- The recommended LVR is 80%; you must have some of this percentage available to claim your second mortgage loan against it.
- Applicants must be 18 years old or older.
- Only an Australian citizen or permanent resident is allowed to apply.
- Applicants must have a good credit score.
- Meet the minimum income requirement as per your lender’s regulations.
How to Apply for a Second Mortgage
Providing a second mortgage on collateral is risky, so only limited options of lenders are available to get your funds.
Here are two ways to choose if you are considering applying for a second mortgage.
- Direct Way
In the direct interaction, the efforts are all yours. You must look for private lending companies offering second mortgage private loans by yourself.
Once found, you are required to send your income and property documents directly to the lender. You may have a limited scope of finding the lender with the best interest rates and risk fees. So, our recommendation is always the next method.
- Indirect Way
Another method is to apply for a second mortgage private loan through a mortgage broker. The brokers have direct access to reputable lenders that will help you lock in a great deal.
Moreover, the broker will handle the complete process, from the initial assessment and suggesting a mortgage product to handing over the money to you. So you do not need to worry about the documentation or other loan application requirements.
Supporting Documents for 2nd Mortgage Application
No matter what method you choose to apply for the loan, you still need to do something. Before applying, ensure you have the following documents for a smooth process.
- Approval from the first mortgage lender.
- Property Title (Copy).
- Current Home Loan Statements.
- Living expenses, assets, and liabilities records.
- The two latest year-to-date payslips (for an employed applicant only).
- The last two income tax returns (for a self-employed applicant only).
Pros and Cons of Second Mortgage Private Loans
A second mortgage private loan is a good option if you need some more cash on a property that is still acting as security for your previous loan. However, it has some drawbacks, too.
Let's review the pros and cons of a second mortgage to ease your decision-making process.
Pros
- A second mortgage enables you to apply for a tax based on the available LVR percentage of the home equity of your property. Hence, you do not need to sell your property.
- The second mortgage is flexible in its use. Hence, it can be used for different purposes, such as debt consolidation or business setups.
- You can claim a second loan on your property without modifying the terms of your first loan.
Cons
- The interest rates are higher.
- Paying for the property assessment and risk fees is an extra financial burden.
- The strict eligibility criteria minimise the opportunity windows for a second mortgage from a private lending company.
The Verdict
Securing the second mortgage means that you have to manage two debts against the same property. The interest rates and instalment value differ according to the lender's rules for the two liens on your property.
Check for eligibility criteria before applying to ensure you do the right thing. Our recommendation is to hire a mortgage broker to handle the process professionally. Hence, you can enjoy a stress-free fund-securing process.
Second Mortgage Private Loans – FAQs
How much money can I get in a second mortgage?
The second mortgage is offered on the available home equity on your property. So, it varies accordingly.
Who is eligible for a second mortgage private loan?
The eligibility requirements vary for each lender. However, only an Australian citizen or permanent resident above 18 years of age meeting the minimum income requirements can proceed to find private lending companies offering a second mortgage.
How do I build equity in my property?
To build equity in your property, you can either increase its value with home improvements or decrease the remaining debt from the first mortgage with additional repayments.
Am I eligible for a second mortgage with a bad credit score?
The associated risk makes lenders reluctant to offer a second mortgage to applicants with bad credit scores. Consider consulting a broker who has experience securing bad-credit home loans.
