As mortgage brokers we use second mortgage lenders when appropriate to do so.
Second mortgages are sometimes the best option, but many mortgage brokers do not understand when and where they should be used. They are definitely not the first choice of loans, but there are times when refinancing a first mortgage might not be possible, or when the costs make it prohibitive to do so.
A second mortgage can then be used in conjunction with a first mortgage and the overall cost is better than refinancing a first mortgage.
How Can A Second Mortgage Be Cheaper?
You need to consider the overall cost and the alternatives.
We recently arranged a $50,000 loan as a second mortgage for a client which is to be secured on their $1,500,000+ valued home along with a first mortgage of about $850,000 which they have with ANZ.
The ANZ mortgage is fixed at 4.25% and the second mortgage is at 19.95%
The interest on the first mortgage is therefore costing $36,125 per year, and the interest on the second mortgage is costing $9,975 per year; therefore they are paying a total interest cost of $46,100 which on total lending of $900,000 means they are effectively paying an average interest rate of 5.12% (interest of $46,100 in $900,000).
In this case the borrowers were in arrears on their first mortgage and being self-employed have not had their financials completed to ‘prove’ income.
Even though a second mortgage lenders are more expensive it was the best option for them.
What Are The Alternatives?
These clients were not in a position to refinance with another bank offering prime interest rates as;
- They were in arrears on their ANZ mortgage
- They are not able to ‘prove’ their income
Taking these two factors into account a bank was not going to be able to refinance their mortgage and therefore a non-bank lender who offers low-doc lending could have been an alternative and is what a lot of mortgage brokers would have probably suggested.
We did consider Resimac Home Loans who do have a low-doc option; however the lowest interest rate they currently offer is the 1-year fixed rate at 5.45% which is 0.33% more expensive and on a loan of $900,000 this means an extra interest cost of $2,970 per year.
Speak To Specialist Mortgage Brokers
Not all mortgage brokers have access to the same second mortgage options that we do, so many do not consider them as a viable option.
Stuart Wills is an experienced mortgage broker and is quoted in Diana Clements recent article in the NZ Herald titled “Is a second mortgage for you?” where he is quoted as saying;
… typically, a second mortgage is a short-term solution. It would be almost inconceivable that a homeowner holds such a mortgage for 25 years. It’s more likely someone takes a second mortgage out in the knowledge that they’ll be “bankable” in six months…
Stuart says he and the team at The Mortgage Supply Company use second mortgage lenders when appropriate to do so, but always consider the options first.
