When it comes to home loans, most banks require you to use your property as collateral, which is called a first mortgage. But have you ever heard of a second mortgage loan? Today, we'll talk about what it is and how it works. 

Let's say you purchased a house and mortgaged it to Bank A for a loan. Your loan is a first mortgage with Bank A. If you want to borrow more money but Bank A refuses to lend to you again, you can consider speaking with lender B. If lender B agrees to lend to you on the condition that you also mortgage the house to lender B, then your loan is a second mortgage for lender B. 

In the event that you cannot repay the loan, and the house goes into mortgagee sales, Bank A's interests will be guaranteed first because it has priority as a first mortgage lender. After Bank A recovers its loan and fees, the remaining money will go toward repaying lender B's debt. That's why the interest rate for second mortgage loans is often relatively high, typically around 15% to 16%. 

In addition to the high interest rate, the lenders providing second mortgage loans are usually non-bank lenders, and the loan amount is not too high, usually less than a few hundred thousand dollars. The loan term usually does not exceed 12 months, and you need to have a clear repayment plan. 

Second mortgage loans can solve the problem of not being able to obtain a loan from a first mortgage lender while not requiring you to transfer all your existing loans to a new lender. However, the interest rate is high, and the loan amount is small, so it can be expensive. In addition, second mortgage loans are only suitable for business purposes, such as investment property renovation, business needs, and property subdivision, and cannot be used for personal use, such as home renovation. 

Here is an example. Our client needed to sell their investment property to cover some personal expenses. However, the property needed repairs that would cost over thousands of dollars, and there was an unconsented structure that needed to be removed in order to comply with current regulations. The client's bank was unable to provide a loan, so they turned to a non-bank lender for help. The company was able to provide a second mortgage loan of $50,000 with a 15.95% interest rate and a three-month repayment period. The total cost of the loan, including interest and fees, was $8,000. Three months later, the client was able to sell the property and repay the loan. 

Second mortgage loans can be an option in times of financial need, but it's important to understand the pros and cons. If you or someone you know is facing a financial challenge, remember that there are options available. If you need our help, please give us a call. Our services are free of charge, and we'd be happy to provide you with a comprehensive check and a customized solution. 

Disclaimer: The content in this article are provided for general situation purpose only. To the extent that any such information, opinions, views and recommendations constitute advice, they do not take into account any person’s particular financial situation or goals and, accordingly, do not constitute personalised financial advice. We therefore recommend that you seek advice from your adviser before taking any action.