Key Takeaways
- A second mortgage loan is a type of financing wherein you borrow against the equity in your existing mortgaged property.
- Home equity is the difference between your property’s current market value and the amount you’ve already paid in your first mortgage.
- The second mortgage is second in priority to the first mortgage, meaning in the event of a default, the first lender will get paid first before the second one.
- Benefits of second mortgages include access to capital, potentially lower interest rates compared to unsecured loans, and flexibility of usage.
- Some risks involve your home value changing due to market conditions and also managing another mortgage on top of your current one.
- Before taking out a second mortgage, it's important to consider factors like interest rates, fees, terms, requirements, and legal considerations to ensure you make an informed decision.
Securing capital is absolutely necessary for business owners, especially when they’re seeking growth or trying to get through shortfalls. However, getting funding can be challenging if you already have existing debt or limited assets to use as security.
One financing option available to Australian businesses is a second mortgage loan. This type of financing allows business owners to tap into the equity of an existing property without having to refinance or modify their first mortgage. Let’s explore what second mortgage loans are, how they work, and how they can benefit your business.
What is a Second Mortgage?
A second mortgage loan is a type of secured loan that allows you to borrow against the equity in a property that already has an existing mortgage. This means you’re taking out an additional loan using your property as collateral. However, the loan you obtain is considered “second” because it is secondary to the primary mortgage you already have on the property.
Second mortgage loans are commonly used by businesses to access funds for a range of purposes, including expansion, purchasing equipment, or even consolidating debts. They’re an attractive option because businesses can use the equity they’ve built up on their existing property as security instead of pledging another asset.
How Does a Second Mortgage Work?
The key aspect of a second mortgage loan is that it allows borrowers to use the equity in their property as security for the loan. Equity is the difference between the value of your property and the amount you still owe on the mortgage. For example, if your property’s current market value is $600,000 and you still owe $200,000, your equity is $400,000.
When you take out a second mortgage loan, the lender might allow you to borrow a portion of this equity, potentially up to 80%, depending on factors like exit strategy and your property’s desirability as security.
However, because the second mortgage is subordinate to the first one, the first lender is paid off first in the event of a default. This makes second mortgages riskier for lenders, which is one of the reasons interest rates are for second mortgages are higher compared to first mortgages.
Second mortgages are typically fixed-rate loans offered by various private lenders. Terms can be as short as 1 month and can be as long as 1 year. Longer terms can be available depending on the lender.
Second Mortgage Loans vs. Refinancing
It’s important to note that second mortgage loans are different from refinancing. When you refinance, you essentially replace your first mortgage with a new loan, possibly at a better interest rate or with different terms. In contrast, with a second mortgage loan, you keep your original mortgage and add the second loan on top of it. This means you are making two separate payments: one for your first mortgage and one for your second mortgage.
For many business owners, this can be an advantage because it allows them to retain favourable terms on their first mortgage while still accessing the capital they need.
Benefits of Second Mortgage Loans for Businesses
Second mortgage loans can be an ideal choice for businesses in various circumstances. Here are some key benefits:
- Access to Significant Capital: Businesses can unlock a large sum of money by tapping into their property’s equity. This can be particularly beneficial for companies looking to make large investments or purchases.
- Lower Interest Rates Compared to Unsecured Loans: Since second mortgage loans are secured by property, they pose less risk to the lender than unsecured business loans. This can reduce overall borrowing costs.
- Flexibility in Usage: Funds from a second mortgage loan can be used for various business needs, such as purchasing new equipment, hiring staff, or launching new products. It gives business owners flexibility in how they deploy the funds.
- Accessibility: Second mortgages are available to borrowers with poor credit histories. There are also low-doc options for businesses without the usual documentation needed for loans.
Risks of Second Mortgage Loans
- Two Mortgage Payments: With a second mortgage loan, you’ll be responsible for managing two separate mortgage payments, which could strain your cash flow if not managed carefully.
- Loan Amount Limited to Equity: The amount you can borrow through a second mortgage is limited by the equity you have in your property. If your property has lost value or you’ve only built up a small amount of equity, you may not be able to borrow enough to meet your business needs.
- Market Risks: If property values decline, you could end up owing more than your property is worth. This can make it difficult to sell your property or refinance in the future.
Key Considerations Before Taking Out a Second Mortgage Loan
While second mortgage loans offer several advantages, it’s crucial to consider a few key factors before deciding to proceed:
Interest Rates
Although second mortgage loans often have lower interest rates than unsecured loans, they tend to have higher rates than first mortgages. Be sure to compare interest rates and calculate the total cost of borrowing.
Loan Fees and Charges
Like any financial product, second mortgage loans can come with additional fees and charges. These may include application fees and valuation costs. Make sure to factor in these costs when assessing the affordability of the loan.
Loan Repayment Terms
The terms of the loan, including the repayment period, can vary. Make sure the terms align with your business’s cash flow needs and financial goals.
Lender Requirements
Lenders offering second mortgage loans in Australia typically require a certain level of equity in your property. While each lender is different, a maximum loan to value ratio (LVR) up to 80%, including your first mortgage and an appropriate buffer is typically required. Some lender will have maximum LVR requirements of no more than 65% and less on specialised or regional security properties.
Legal Considerations
Responsible consumer lending laws in Australia don’t apply to 2nd mortgages. Responsible lending laws in Australia require lenders to assess whether a loan is suitable for the consumers’ needs and financial situation. This means lenders must consider factors such as income, expenses, and credit history before approving a loan.
Second mortgage business loans are only offered to business entities such as companies and trusts and are not afforded the same regulatory protection as consumer loans. Loan contracts for second mortgages will specify borrowers stipulate the loan is for business purposes before funding is approved for settlement to applicants.
To Wrap It Up
Second mortgage loans can offer Australian business owners a flexible and accessible way to unlock the equity in their property to fund their business needs. As always, careful planning and a clear understanding of your financial commitments are key to making the most of this financing option.
Get a Second Mortgage In Australia
If you’re looking for a way to raise capital for your business, getting a second mortgage may be a great course of action. Contact our team, and we’ll help you select the right financing solution for your business needs.
