When To Use A Second Mortgage Provider

Homeowners often want to borrow more against the equity in their home. Taking out another type of home loan with the one mortgage provider is usual practice and home loan providers want first lien priority in the event of a default.

However there are times when using a second mortgage provider makes more sense.

Is it more prudent to refinance the existing loan or simply secure an additional one with a different provider?

In this article we consider first and second mortgage providers and when it makes sense to use them.

First Mortgage Provider

Over time, you’ve been reducing the principal, i.e., the loan amount, and your home has increased in value.

There is equity in it that you can borrow against. You can refinance your home loan to borrow more by using the existing provider or moving your home loan structure to another provider.

Usually, you’d be offered a two-tier loan structure, with one loan having the lion’s share and the additional top-up loan being a home equity release loan, either as a lump sum or revolving line of credit known as a Home Equity Line of Credit (HELOC).

The monthly payments will be in two amounts – one for each loan.  The home equity loan will incur a higher interest rate than the table loan, which would be the lion’s share of your borrowing.

Refinancing as a first mortgage, i.e., with one provider, is a popular choice among homeowners. This restructuring to access the increase in property value is often preferred over the alternative of taking out a second mortgage with a second mortgage provider, primarily due to its higher acceptance rate with providers and lower administration costs.

Second Mortgage Provider

The second mortgage is essentially an additional loan with a second provider. There is also such a thing as a third mortgage and a third loan provider. This loan set-up is less popular with homeowners unless they are borrowing from their home equity to invest in a business. However, it is usual for real estate investors with rental properties to take out second or more loans.

Second mortgage providers accept that they have second lien priority in the event of a default. Hence, their loan interest rates and fees are much higher.

You’ve probably seen a home listed as a ‘mortgagee sale.’ This is when the first mortgage lender sells the house to return the principal amount of the loan to them.

A mortgagee sale is not motivated to sell for a price that covers the second or third mortgages—hence, the risk of default is much higher for secondary loan providers. They take on the risk for much higher fees and interest rates.

When To Get A Second Mortgage

A second mortgage is usually used when the homeowner needs extra funds. Here are four reasons to choose this type of loan over others.

Pay Off Unsecured Debt

There are many reasons for getting into debt. For example, credit cards have a high interest rate, and it’s hard to pay the debt off quickly. Consolidating high-interest loans into one low-interest loan makes sense.

Home Maintenance

All homes depreciate, and as such, they need ongoing maintenance and eventual replacement. A second mortgage is a good fit for providing the funds for home maintenance and replacement projects.

Homeowners of older properties will require more budget for annual maintenance. When you purchase a home, get an understanding of the necessary budget for its upkeep. Older homes may cost less to buy than newer homes, but you’ll need more of a contingency fund for when things break or are damaged.

Renovation Projects

Home improvement can be a minor job like painting or replacing flooring or a significant one like adding to your existing floor plan—all homeowners renovating struggle with getting the budget right.

There are always unforeseen expenses for larger projects. A quantity surveyor will help assess the cost of materials, but you may change your mind on what you want, and this is where there is a budget blowout.

A second mortgage can be flexible because if you need to borrow more, you can have enough equity in your home.

Settle Unexpected Debt

Some insurance policies won’t cover ‘act of god’ events. For example, if there’s a weather event that leaves your house uninhabitable or unsafe, you’ll need to cover the expense of work done so you can return home. A second mortgage can make the difference of getting the work done immediately or needing to relocate until you can afford to fix your home.

Unexpected debt can throw any household budget into chaos. The debt could be emergency medical costs that remain outstanding after insurance has paid the bulk of the expense. The sudden need to replace a car or deal with a plumbing emergency is also an unexpected debt.

A second mortgage can cover these and similar emergencies. The mortgage buys time to settle the obligation over time while incurring a more competitive interest rate.

Summing Up

When a property appreciates, there is an opportunity to secure a second mortgage.

Using a second mortgage instead of other loan products like personal loans makes sense and it’s easy to do when there is equity in the home to use. Plus, there may be some tax incentives for taking a second loan for home improvements, like improving energy efficiency. For example, some countries will provide tax incentives for installing solar power, upgrading water cylinders, or heating systems.

Where you get your second mortgage is important. Using a first mortgage provider is the norm; however, investors or homeowners who need to invest in their business use second mortgage providers.

Caveat emptor: Always get professional advice before taking out a loan.