Second mortgages are generally used for a short period of time (usually anywhere from 6-months up to 5-years) to provide additional funding to “fix” a problem or cover a short-fall.
The advantage of using a second mortgage is you can retain the main lending at more competitive rates.
Common Uses For A Second Mortgage
Common uses for second mortgages are;
- To pay for renovations
- To provide the extra deposit required – for low deposit mortgages
- To finance the building of a minor dwelling
- Finance for a business or refinance expensive business debt
- To pay off tax arrears
- To pay mortgage arrears
- Debt consolidation of some short term debt – hire purchase or credit card debt
- Plus many more reasons…
Renovation loans – often getting bank finance for a renovation can be difficult as the value is not added until the renovation is complete. When the bank is not an option it is worth considering a second mortgage or specific renovation loan (caveat loan) so you can finance the renovation, and then on completion you can top-up or refinance your existing mortgage to incorporate the money borrowed for the renovation.
For buyers and particularity first home buyers who may be short on deposit a second mortgage is an option to consider. In most cases the banks do not allow a second mortgage; however most non bank lenders will allow second mortgages to be used in combination with a first mortgage. This can be a good option for those people looking for a low deposit loan.
Lending for building a minor dwelling – this is where a second mortgage is a good option. The concept is similar to that of a renovation loan, but on a larger scale.
Business finance – often the banks will make you jump through hoops to get business finance and therefore a second mortgage attached to your home loan can be a very good option. This is an especially good option for a business start-up where there is no ability to prove the business income, or for a new business where you may be leaving a job to start a business and have no ability to prove your income.
Financing tax arrears – having tax arrears can be extremely stressful and very expensive. Banks do not like financing tax debt as they treat it like bad debt and see that those people who have tax arrears are not a good credit risk. It often makes sense to get a second mortgage to get the tax debt paid, and then at a later stage top up your home loan to pay off the second mortgage or refinance your home loan to consolidate the second mortgage.
Finance your mortgage arrears – when your mortgage repayments fall behind the bank can get quite harsh. As mortgage advisers we will often arrange a second mortgage which allows you to get your mortgage repayments up to date and often to resolve the problem that caused the mortgage to fall behind in the first place.
Debt consolidation – often short-term debts are expensive and especially if you have too many. The ideal is to consolidate debts into a low cost first mortgage, but the next best option is often a loan secured by a second mortgage or a caveat.
Every Situation Is Different
As top New Zealand mortgage advisers we arrange a lot of second mortgages for people throughout the country.
There are a number of lenders which have different criteria so it really is a point of matching the best loan to the situation, and with so many different situations we do have to keep up with the various lenders and loan options. We are often referred to as the non-bank brokers with the ability to source second mortgages from lenders that most people have never heard of.
Of course if I think there are benefits to refinancing you mortgage instead of a second mortgage then we will discuss this with you.