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If you have one mortgage, you actually can take out a second mortgage on the same property. This means you are borrowing money a second time, using the same asset (your property) as security to back the mortgage. If you can't repay your loans, the first lender gets paid out first if you're forced to sell your property. This means the second lender is taking a bigger risk.
And this is why a second mortgage is a risky way to get finance. You may have to approach a smaller specialist lender and pay more in fees or a higher interest rate. Refinancing your existing home loan makes more sense for most borrowers.
If you're already paying off a mortgage on a property, taking out a second mortgage involves applying for another loan with the same property as security. You need approval from the first lender before you can get the second mortgage too, which complicates the process.
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.
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 and not one you should take lightly.
People choose to take out a second mortgage for a wide range of reasons. Here are a few of the benefits that people look at getting from a second mortgage:
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.
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:
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.
If you’re taking out a second mortgage with the same lender that offered your first mortgage, you may be able to borrow up to 95% LVR (loan to valuation ratio). Meanwhile, borrowers taking out a second mortgage with a different lender may be able to access a loan with up to 85% LVR allowed.
If you’re self-employed and looking for a low doc loan, you won’t be able to get approval for a second mortgage unless you go through a private lender, which is not recommended.
Taking out a second mortgage isn't a decision that should be taken lightly. 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.
To get an idea of the added expense, it might be a good idea to use a mortgage calculator to work out what your repayments are likely to be and then see if they will be manageable on your current budget. As with any other mortgage, you should also consider the rates and fees that are associated with the loan as well as the terms that are being offered by the lender.
Before you even consider taking out a second mortgage, make sure you’re fully aware of all the risks and drawbacks of this approach:
A second mortgage isn't regularly available through mainstream lenders. Rather, they're usually available through mortgage brokers, solicitors arranging funds through private investors or through vendor finance.
The application process for a second mortgage is similar to that of your first mortgage, with a few key differences. For instance, you’ll have to provide details of your existing loan in addition to your personal and financial details. Specific eligibility requirements will differ between lenders, so be sure to compare your options and find a loan that you’ll be eligible for.
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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.
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