The advantages and disadvantages of second mortgages

The advantages and disadvantages of second mortgages

Whilst it seems that most people are well aware of how a mortgage works, the idea of getting a second mortgage seems to puzzle some. Opinions tend to vary, but often the problem is that people don’t really know what a second mortgage is. Here is a look at some of the advantages and disadvantages of taking out a second mortgage, so you can decide whether it is suitable for you.

Second Mortgages Explained

In a nutshell, a second mortgage is another loan secured against your property. As it is the second loan secured on the property, the priority will always go to your first mortgage in the event of a default before the second mortgage is considered.

Reasons to Get a Second Mortgage

Second mortgages are incredibly useful if you require a large sum of money which you wouldn’t be able to get with an unsecured loan or credit card. Using the equity in your home can be a great way to borrow a larger sum of money than it would be otherwise possible to get. This is due to the fact that a loan secured against a home is considered to be a safer bet by lenders.

You may wish to take out a second mortgage to complete large-scale home improvements or build an extension. Many people choose to borrow against the value of their home to purchase additional properties or consolidate existing debts. As with any debt, it is never wise to take out a second mortgage to purchase anything frivolous.

Disadvantages of Taking Out a Second Mortgage

First and foremost, it should never be forgotten that in getting a second mortgage you are putting your home at risk. If you are unlikely to be able to afford to keep up with the repayments you risk losing your home, so be sure to do your sums properly before applying.

Second mortgages often come with a higher interest rate than primary mortgages. This is due to the additional risk factor involved in it not being the first mortgage secured on the property. In the event of default and repossession, the first mortgage takes priority and only once that has been cleared will the second mortgage provider receive any of the funds.

With banks and building societies still reluctant to lend after the credit crunch, getting a second mortgage can also be difficult. You will have to have a secure income, a good credit rating and sufficient equity in your home to be considered by most lenders.

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