What is a second mortgage?
A second mortgage is a type of loan that is taken out which involves using your home as collateral. This will be on top of the existing loan that is secured by the property. If the situation were to arise where you were unable to pay your debts and the house was sold to recover money owed. Your original mortgage would be paid off first and the second mortgage paid from any remaining balance. This makes them slightly riskier to the lender and explains why they normally attract a higher interest rate than a first mortgage.
The New Zealand domestic property market has shown remarkable growth over recent years and many homeowners have built up equity in their homes. By utilizing this equity through a second mortgage it may be possible to improve the home and increase the value of the property further.
How does it work?
Many people have built equity in their home, they owe less than the current selling price of the property. A second mortgage allows homeowners to borrow against this amount. The process is very similar to that of applying for a first mortgage. You may need to get an appraisal to confirm the current value. Typically, it will be possible to borrow up to 85% of the current value of your home, less the current first mortgage debt. If you fail to meet the payments, the lender can foreclose on your home, in an effort to recover the amount you owe.
A second mortgage has flexibility and the amount borrowed can be spent on whatever you wish. It could be used, for example, to pay off more expensive credit cards and clear all your expensive unsecured loans. The longer repayment period of a second mortgage can reduce your monthly payments.
Repayment of the second mortgage will be through regular payments, which may be weekly or monthly. These payments will need to be made on top of your normal mortgage payments.
What are the benefits of a second mortgage?
There are so many benefits from taking out a second mortgage. Here are just a few of the ways that you can make a second mortgage work for you.
- A second mortgage is going to allow you to release the equity in your home, so you can use it now.
- The second mortgage allows the individual to access a relatively low-interest loan. Cheaper than a credit card or other unsecured loan.
- Have you ever wanted to start a business? A second mortgage can finance that dream.
- They are perfect for helping you get the deposit for a new home before that bargain slips away
- You can save yourself money by using it to pay off a high-interest debt that is costing you a fortune.
- This loan can be for up to 30 years, which is longer than the term of the typical personal loan.
- Because of the longer period, the monthly repayments will be lower and more affordable.
- Your interest rates may be variable (seek advice on each case).
There are benefits to a second mortgage and it allows the borrower to access equity and put it to good use. It can be a powerful tool for homeowners to consider. One which can be used for debt consolidation, property improvement, or even starting a business.
It is a lower-cost financing option. However, it must be remembered that the loan is secured against your home and could put your home at risk.
Careful consideration of the benefits and potential risks to the home should be undertaken before taking on a second mortgage.