Second mortgages

Housing Market Written by Squirrel, Apr 25 2009

It has become a lot harder to get a mortgage, unless you have a big deposit or equity in another property. If the bank says no, then a second mortgage can be a cost-effective and flexible back-up option. A second mortgage is exactly that. For higher-risk lending we sometimes use a bank for the first mortgage (has first priority over the property), and arrange a second mortgage with a finance company. The first mortgage will be up to 80% of the property value for owner-occupied and 70% for investment property. The second mortgage then fills the gap all the way up to 90%. You will still need a 10% deposit.

Doing a second mortgage is surprisingly cost-effective

All lenders price for risk. The riskier a deal, the more you will pay. If you are borrowing over 80% you will typically pay an extra 0.50% and 1.00%. This applies to the whole mortgage. With two lenders involved there is no premium on the first mortgage. There is a large premium built into the second mortgage. Second mortgages cost up to 14%pa, but you need to look at the overall interest rate and repayments before comparing to other options. We structure the first mortgage as interest-only so that the more expensive second mortgage is repaid first. This keeps your increase in borrowing costs to an absolute minimum. The monthly repayments are not materially different from what you would pay normally. (In the real example above the difference is $18 per month.) Second mortgage can be repaid as quickly as you like (including lump sums.) So after six months, if the property value has increased above your purchase price, we can consider increasing the first mortgage to repay the second mortgage.

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