Should I combine my first and second mortgages?

Most Australian homeowners purchase a home by taking out a mortgage. Some even take out a second mortgage on the same property if the need arises. There are multiple reasons to consider taking out a second mortgage, such as consolidating debts, renovating or repairing your home, or accessing your property’s equity for other purposes.

However, there are a few reasons you may want to consider consolidating your first and second mortgages. For example: 

• You may find it challenging to manage repayments on both mortgages.
• If one of the loans’ interest rates is much higher than what you’d like to be paying, combining your first and second mortgage may allow you to save on interest charges.
• It may also be inconvenient to deal with two loans with different repayment dates, so it may be simpler to have just one loan.

Can I get a better interest rate?

One reason for wanting to refinance your first and second mortgage into one loan is that you may be able to get a better interest rate on one, or possibly both of the loans.

You may find that lenders expect you to pay a higher interest rate on your second mortgage than on your primary home loan. This is because your second mortgage is considered a ‘cash-out’ loan, meaning that you used the equity in your property to pay for something other than the house itself. Cash-out loans are often seen as a higher risk to lenders, so they may charge you a higher interest rate to take yours over. 

A refinancing calculator can help you get a better idea of how much you could potentially save in interest charges by switching to a mortgage with a lower interest rate. You could also estimate how much faster you may be able to clear the loan principal by continuing to make higher loan repayments while on a lower interest rate.

You’ll need to check the best rate offered by various lenders who are willing to offer you a loan and confirm that you can save money. Be wary of dubious lenders who seem to make things easy but charge high interest and fees. 

Also, there’s more to a home loan than just its interest rate. Ask about all the costs related to your current mortgage and the new one after refinancing, including interest, fees and charges. Consolidating the two mortgages should give you real savings after considering all costs. Don't base your decision on a lower monthly repayment amount only; consider all costs over the loan’s entire duration.  

What else should I look for when combining mortgages?

It’s often far more convenient to deal with just one loan account than two. You don’t need to track two lenders, two loan balances, and different repayment schedules. But there are some other aspects that you need to think about as well. 

If your credit rating has been affected by any payment delays or defaults on one or both of your loans, lenders will likely charge higher interest rates, so it may not be the best time to initiate debt consolidation. You may want to manage your current loans’ repayments and improve your credit score before attempting to combine your first and second mortgage.

Refinancing your first and second mortgages into one loan can be more complex than a regular home loan application. Consulting a mortgage broker can help you break through the complexity and structure the new arrangement to help you get the best terms for your financial situation and personal goals. 

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