Getting a second mortgage

Australian borrowers can take on a second mortgage to access home equity. But it's a risky and expensive alternative to refinancing.

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Richard Whitten

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Key takeaways

  • A second mortgage allows you to access the equity in your home, which unlocks more cash. It's an alternative to refinancing.
  • But second home loans generally come with higher interest rates and are very risky.
  • You can't get a second mortgage from a lender directly. Specialist brokers and private lenders can arrange them.

What is a second mortgage?

The term "second mortgage" doesn't mean getting a second home loan for a second property (like buying an investment property after purchasing a house to live in). It refers to taking out another mortgage on the same property as your original mortgage.

Two loans, secured by one property. The second mortgage is a smaller home loan that lets you borrow some of your equity (the amount of your home you actually own).

You pay off both loans at the same time and use the cash from the second mortgage for whatever you need — investing, buying another property, upgrading your home or anything you want.

Your original lender also needs to approve the second mortgage and have the new lender added to the Certificate of Title. This makes the arrangement even more complicated.

The risks

Repaying two loans at once is obviously a risk in itself. The second mortgage is also a much bigger risk for the lender. Both lenders use your property as security for their loans.

But if you are unable to make your repayments your first lender can force the sale of your home to recover your debt. The first lender takes priority over the second lender.

This means the second lender is taking a bigger risk. And this means you will have a much higher interest rate on the second mortgage.

Refinancing your existing home loan to access equity makes more sense for most borrowers.

How does a second mortgage work?

The second mortgage is ranked behind your first mortgage, which means that if you don't repay your debt and your property is sold, your first mortgage will be repaid before your second.

For example, let's assume you have a mortgage for $200,000 secured on your home with Lender A and you apply for a second mortgage of $200,000 on the same home with Lender B.

If you couldn't pay back the loans and the property was then sold for $380,000, Lender A would be repaid in full and Lender B would only receive any amount that was left over.

But Lender B could still pursue you for the remaining money after the sale.

Is there any good reason to take out a second mortgage?

For the majority of borrowers, refinancing their existing loan with another lender offers a less risky option as it allows them to access a higher amount.

Taking out a second mortgage is only really a viable option for a borrower in need of lots of cash fairly quickly who can't refinance for whatever reason. This could be because your lender won't approve the new loan amount or your loan is a fixed rate and there's a big break fee to pay.

You may be motivated by a sudden expense or a time sensitive, highly profitable investment and need a second mortgage to get cash fast. Obviously, this is an extremely risky move.

Why borrowers might get a second mortgage

  • Access equity. A second mortgage allows you to access the equity in your home, which can help free up your cash flow.
  • Debt consolidation. Accessing the equity in your home means you can work towards paying down and consolidating your debts.
  • Alternative to refinancing. A second mortgage also provides an alternative to refinancing, which may involve break costs, exit fees and other legal fees.
  • Home renovations or repairs. Accessing home equity can also allow you to make much-needed home renovations or repairs, which can also increase the value of your property.

Acting as a guarantor

Another common situation where a second home loan can be helpful is where you are guaranteeing a loan for someone else, such as if you're using your home as security for your child's home loan. In this case, the second mortgage provides added security for the bank, allowing them to recoup their losses in the event that your child defaults on the loan.

Is it difficult to qualify for a second home loan on my property?

Because second mortgages offer much less security from a lender's perspective, the majority of lenders will either place tight limits on the amount you can borrow or simply refuse to offer you a second mortgage altogether.

There are 2 ways you can maximise your chances of getting a second mortgage approved:

  • Approach a specialist lender. There are small lenders who specialise in second mortgages and other unique loans such as bridging finance, caveat loans and reverse mortgages. Keep in mind that these lenders will almost certainly charge you higher interest rates and some big fees.
  • Talk to a mortgage broker. Checking in with a qualified mortgage broker is a good idea even if you are looking at a few specific lenders. They can talk you through your options and suggest lenders you may not know about.

If you want to take out a second mortgage, you'll need to get approval from the lender that financed your first mortgage. You'll typically need to pay a fee of a few hundred dollars to get the first lender to assess your request.

Risks of a second mortgage

Second home loans generally come with higher interest rates, so you'll need to make sure you'll be able to afford the additional repayments.

Before you even consider taking out a second mortgage, make sure you’re fully aware of all the risks and drawbacks of this approach:

  • Taking on more debt. Make sure you can afford to make repayments on 2 mortgages before you adopt this approach.
  • High fees. As a general rule, second mortgages attract higher fees than first mortgages. You’ll also have to budget for a fee your first lender will charge before providing their consent for you to take out a second mortgage.
  • Lower LVRs. Second mortgages usually attract a lower maximum loan-to-value (LVR) ratio than first mortgages, which means you won’t be able to borrow as much money as you would on a normal home loan. Lenders will generally agree to let you borrow between 60% and 80% of the property’s value, although this may be slightly higher if your first and second mortgage are with the same lender.
  • Managing 2 loans. Managing 1 home loan and staying up to date with repayments can be tricky enough in itself, so servicing 2 separate mortgages can be even more complicated and confusing – especially if the loans are with 2 different lenders.

Frequently asked questions

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Senior Money Editor
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Richard Whitten is Finder’s Senior Money Editor, with over eight years of experience in home loans, property, credit cards and personal finance. His insights appear in top media outlets like Yahoo Finance, Money Magazine, and the Herald Sun, and he frequently offers expert commentary on television and radio, helping Australians navigate mortgages and property ownership. Richard started his career in education and textbook publishing in South Korea. He holds multiple industry certifications, including a Certificate IV in Mortgage Broking (RG 206) and Tier 1 and Tier 2 certifications (RG 146), as well as a Bachelor of Education from the University of Sydney and a Graduate Certificate in Communications from Deakin University. See full bio

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2 Responses

    Rick's avatar
    RickJuly 15, 2017

    If you’re house is paid off can you get a heloc if you’re retired and haven’t had an income for the last 10 yrs.

      Danielle's avatar
      DanielleJuly 17, 2017

      Hi Rick,

      Thanks for your question.

      I’m afraid you would need to have some forms of income if you wish to apply for HELOC. Since you’ll be borrowing money, you would need to repay your balance and if you don’t have a stable income to make repayments, then you may find it hard to get approved for HELOC.

      With this in mind, I highly recommend you compare lines of credit loans and access your equity. See if there’s any provider who may be able to help and guide you through the process.

      I hope this helps.

      Cheers,
      Danielle

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