Can you have two home loans on one property?

A second home loan has many differences from your first mortgage and is often more similar to a line of credit. The loan amount is based on the equity you have available on your existing property. Home equity is the difference between the current market value of your home and the outstanding mortgage. As the same property is being used as security for both mortgages, you’ll require permission from your current lender to take out two mortgages on one property.

The mortgages are ranked in order, which means the first mortgage takes precedence over the second one. If you sell your property, the outstanding balance on the first loan must be fully repaid before any balance can be used to repay the second mortgage. This may make it a little more challenging to get two separate mortgages on one property.

Should you take out a second mortgage?

Generally, you may find it easier to refinance your home loan from another lender as it is relatively low-risk and provides a higher amount. In some instances, however, having two mortgages on one property may be more beneficial. One example is if your existing lender doesn’t approve a higher amount when refinancing, a second mortgage may work to your advantage.

It may also be a lucrative option if your first mortgage has a lower fixed interest rate compared to the variable interest rates on a refinanced loan. In this case, you’ll also save on exit fees. Lenders charge exit fees or break fees if you repay a fixed interest rate mortgage before the end of its fixed period. A second mortgage may also be beneficial if you want to act as a guarantor for a friend or family member’s home loan. 

Advantages of a second mortgage

The decision to take out two home loans for one property will depend on your personal situation. A second mortgage may be advantageous if you want to raise additional funds via your home’s equity. It may also be used to consolidate your debt.  You could use the second mortgage loan amount to repay other debts like personal loans or credit cards. A second home loan may also be used to repair or renovate your property. You may also want to access a second mortgage to avoid exit fees and legal fees while refinancing or to be a guarantor for a friend or relative. 

Risks of a second mortgage

You must consider the possible risks before you take out a second home loan. It increases your debt obligation, and you must analyse your financial situation to ensure you can make the additional repayments. Lenders may also charge higher fees on second home loans because the risks are higher for them also. Lenders are conservative in allowing second mortgages as it increases the risk of default. Financial institutions also offer a lower loan-to-value ratio (LVR) ranging between 60 per cent and 80 per cent of the property value. Managing two loans, especially if obtained from different lenders, may be complicated and cumbersome.

Several lenders have stringent second home loan requirements as they’re wary of approving a second mortgage due to the higher risks. Also, approval from your existing lender is required, and your lender may charge some fees to assess your request for approval.

You can find out whether a second mortgage is a suitable financial option for you by speaking with a qualified and experienced financial professional.

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