With the LVR restrictions introduced by the Reserve Bank and the major banks shying away from bridging finance, mortgage brokers must think outside the box to meet people financial needsand this is a reason that some mortgage brokers are using second mortgages.
A second mortgage from a reputable non-bank lender can provide the funds needed.
These non-bank lenders can help meet people’s short-term financial goals (or needs) but as with any lending option there are always pros and cons to consider.
Why Use A Second Mortgages
The aim is to get from point A to point B as simply as possible and sometimes using second mortgages will be the easiest way to free up capital to meet your needs.
However, its important to understand that they’re not designed to be long-term solutions, as they have higher interest rates and fees attached to them.
With this in mind, second mortgages should only be taken out for a short time, ideally around six to twelve months.
Speak to an experienced mortgage broker like Stuart Wills when you have a situation that needs some extra thought. Stuart is very experienced at looking at alternative ways to address financial needs, and unlike most brokers have never worked for a bank which tends to mean his thinking’is more logical rather than process focused.
When to consider a second mortgages;
- Short-term bridging finance – a second mortgages should be used as a short-term measure to help fund . For example, when clients need to borrow against their house to get through a period of uncertainty, like losing their job, setting up a new business or for help with purchasing an expensive item, knowing they can pay it back quickly. Alternative lenders are able to help meet these short-term needs.
- As an alternative funding option when a client’s bank says ‘NO’ – with the new LVR restrictions in place there are times when banks say ‘NO’ and therefore you can be left in a very awkward situation. This is where a some brokers that work with non-bank lenders can offer other options like second mortgages that can help ‘fix’ those short-term problems.
- Working capital for a client’s existing or start-up business. People setting up a new business or expanding an existing one may need a short-term stopgap between starting out and being able to apply for a bank loan. A second mortgage can help achieve this.
- Debt consolidation loans – a second mortgage can help tidy up any outstanding personal loans, credit cards, store cards and arrears on the first mortgage. Plus, with loans being consolidated you will often pay less interest in the long term, especially when the second mortgage can be refinanced into the first mortgage.
- Emergency funds – unfortunately at times we can get caught out where due to unforeseen circumstances and maybe a little lack on planning we need some money in a hurry. Examples may include when we are sick for an extended period (or our partner or family are), due to redundancy or even the death of someone close. A second mortgage can help tidy up any outstanding personal loans and arrears on the first mortgage. Plus, with loans being consolidated they’ll pay less interest in the long term.
Private Lenders – “the pros and cons
I’ve heard a few “people, accountants and even advisers say they’ve moved a client’s lending to non-bank lenders (or private lenders) entirely. These alternative lenders are not governed by the new LVR restrictions, so they can often help meet your needs when a mainstream bank is unable to.
While on the surface this may seem to be a quick fix” to solving your needs, it’s important to consider the long-term impact of moving your lending away from a mainstream bank. You don’t want to shut the door on the ability to return to a bank for lending in the future so this needs to be a consideration.
On the positive side, because second mortgage lenders don’t have the same constraints placed on them, their guidelines for documentation and qualification for lending can be less stringent than banks. This is why they can potentially be a better option when there is a short-term issue that needs to be addressed.
Combined First & Second Mortgage
Often it is best to keep the majority of your lending with your main bank and use a second mortgage for any additional finance that you require.
This way you retain the lower interest rate with your first mortgage and just pay the higher second mortgage interest rate on the smaller amount.
The aim of course will be to either pay off the second mortgage or consolidate this into your first mortgage when you can.