Second Mortgages & Their Exits
Many borrowers that have taken second mortgage loans are often unsure of how they will end up repaying their loans. In this article we provide some orthodox and unorthodox solutions borrowers have, to repay their second mortgages.
Most second mortgages either have their interest capitalised (paid in advance) or have interest paid monthly. Very rarely are second mortgages repaid through principal and interest repayments.
Whilst interest only repayments help alleviate stress for borrowers during the course of the loan, as it allows for greater free cash flows. The exit (refinance or sale of an asset) is something that causes many borrowers a great deal of stress.
Knowing your exit for a second mortgage loan is crucial, as the penalty rates on second mortgage loans can be quite high.
If after reading this article, you feel confused about which path is best for you or would like a delivered solution please don’t hesitate to contact us here.
Repayment strategies for your second mortgage loans.
Bank refinance
One option for refinancing your second mortgage loan, is financing from a bank. Typically, most people that take second mortgages were unable to get bank funding in the first instance, due to serviceability or bank requirements. However, after a period of time, for example of 6 to 12 months, bank funding may become an option again.
Bank funding should be the first option for refinancing your second mortgage loan, as it presents both the highest LVR and lowest cost of capital. The refinance can be for the entirety of the loan amount (first and second combined) or it can be a top up of your existing first mortgage facility to repay the second mortgage component.
Typically bank loans can take 5 weeks to 3 months to finalise if you’re submitting a new loan.
Second tier refinance
Lenders such as liberty and La Trobe offer second tier lending solutions, with far less stringent conditions than banks. Typically, these loans take 4 weeks to 6 weeks to finalise if they are being done from scratch. Pricing is higher than a bank, and the LVRs offered are lower than bank.
There are a number of second tier lenders in the market, and if you’d like to know your options speak to us and we’ll point you to the right broker to help you.
Second mortgage private lender refinance
You can refinance your existing second mortgage loan through another second mortgage lender. This is convenient if you only need the loan for a short period (less than 12 months) and are unable to access bank funding / tier 2 lending.
If you’d like to know more about our private lendersecond mortgage terms click here. Most of our deals go up to 80% LVR, and most valuations are done in house.
First mortgage private lender refinance
Another option you may wish to consider, is you can refinance the whole component of your debt, first and second mortgage combined through a first mortgage private loan with a private lender.
Refinancing with a first mortgage private loan, makes sense where the cost of your bank debt combined with your existing second mortgage private debt, is cheaper or close to your current interest repayments. Or where you have no other option to refinance through traditional means.
Click here to read about our first mortgage private lender terms.
Repayment through business profits
Depending on the size of the loan, and the profitability of your business, you may be able to repay the loan from your business profits.
This can look different for several situations.
Profits may come via second mortgage funds that were used to order inventory that were then sold, plus a profit margin. Or the second mortgage funds were used for a property development that was later sold.
Business cashflow loans
Depending on the revenues of your business, you may be able to refinance your second mortgage loan via a business cashflow loan based on your business revenues. Different cashflow lenders will have different lending parameters.
Speak to us and we can point you to the right specialised cash flow brokers to help you.
Invoice financing Solutions
Invoice financing is where your business uses invoices as a form of security to take a loan. Therefore, if you are expecting a large payment of revenues to come in and require an urgent refinance, you can use this solution instead of waiting for your debtors to pay your invoices.
You can read more about our invoice financing solutions here.
Capital raising against existing assets
You may have plant, equipment and vehicles that are relatively new and worth a significant amount of money. There are several equipment financiers, that will lend you funds against these assets and amortise the loan repayments over period of time.
Depending on the size of your second mortgage loan, this option can be a viable solution.
The benefit of such loans is that the cost of capital is cheaper, repayments are done over 3 to 5 years, and repayments are principal and interest. Setting up such facilities typically takes 3 weeks to 6 weeks.
Speak to us if you’d like us to connect you with a specialised equipment finance broker.
Sale of assets
Many people that take second mortgages will take loans against assets that are already due to be sold. As such, second mortgage loans can be a quick way of doing an equity release without the headaches of dealing with a bank.
Other times, borrowers will take second mortgages against existing assets, to complete property developments or other business ventures. On crystallisation of those ventures, assets are sold and funds repaid. For example, we have had clients take a second mortgage loans for the purposes of acquiring heritage plates, and later selling them for a profit.
Alternatively, a small number of borrowers may deem it in their best interests to sell an asset with all of its debts, rather than carrying on with the interest burden of their total debt.
This is typically seen as a measure of last resort, and most reputable private lenders will do their best to help you refinance first, even if they must take a haircut on their fees instead of going down this path.
To learn more about second mortgage loans click here.
