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What is a second mortgage?

September 23, 2023

Welcome to the finance update for the week ending 23 September, 2023.

It was announced this week that CBA has been selected as the favoured financial partner for Tesla Australia. Under this arrangement, both CBA’s business and retail clients will have the opportunity to secure financing via the Tesla website, directly through the bank.

It’s an interesting strategic partnership and given the enormous interest in Tesla’s and EV’s more broadly, it will no doubt add plenty of flow to CBA’s asset finance coffers. The news came amidst record growth in asset finance for CBA, heavily driven by EV financing, which is up 235% in the last financial year.

In this week’s newsletter, we take a look at second mortgages; what are they and why caution should be exercised when contemplating one.

A second mortgage, in simple terms, is an additional mortgage that you can obtain on a property that already has an existing one. It’s a financial option you might consider if you want to leverage the equity in your current home to access additional funds.

What should you be cautious about with a second mortgage?

If someone is contemplating a second mortgage, it’s essential they exercise caution regarding higher fees and charges, potential fees from their primary lender, their financial circumstances, stricter lending criteria, and the risks associated with using a second mortgage for property investment.

Higher fees and charges
Lenders often perceive second mortgages as riskier because they are secondary in priority. In the event of a default, these lenders only receive funds from the sale of the property after the primary lender recovers their owed amount. Consequently, interest rates and associated fees for second mortgages are typically higher.

Budgetary considerations
Taking on a second mortgage means managing an additional loan alongside your primary one. Borrowers need to evaluate their ability to handle repayments for the second mortgage, particularly in the context of current living costs and financial pressures.

Stricter lending criteria
Financial institutions closely scrutinise your financial status and repayment capability when extending loans. When applying for a second mortgage, lenders may impose stricter assessments to ensure you can meet the repayment obligations.

Investing in additional property
Some individuals may use a second mortgage to finance the purchase of a second home or an investment property. While this strategy has potential benefits, it also carries risks, especially if the housing market experiences a downturn that impacts the value of one or both properties. Negative equity, where your property’s market value falls below your remaining home loan balance, can be a concern in such scenarios.

If you have a client who is contemplating a second mortgage for any reason, have them contact us on 1300 300 296 to properly assess whether it is he right thing for them to pursue.

Any changes in interest rates from last week are highlighted in orange.

Note – Increases announced by lenders as a result of RBA decisions normally take 1-2 weeks to come into affect.

Variable

The rates below are based on a $500,000 loan, with the borrower making principle and interest payments with a loan term of 30 years. The rates quoted may vary depending on the borrowers LVR.

1 Year Fixed

The rates below are based on a $500,000 loan, with the borrower making principle and interest payments with a loan term of 30 years. The rates quoted may vary depending on the borrowers LVR. At the end of the three year fixed period, the borrowers interest rate will revert to a standard variable rate for the life of the loan.

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