Examples of When Second Mortgage Loans Are Suitable
Second mortgagage loans, usually attract a higher interest rate / price premium, because of the additional risk they take on. They typically are ranked behind the first mortgage party which is usually a bank. Because of their second ranking, they are in some respects at the mercy of the first mortgage holder in the event a default happens. Typically, these loans attract a higher rate, due to the higher risk they are taking on, with pricing that sits between 18% p.a to 24% p.a, depending on the amount, the total LVR and loan duration.
So the question is, should a borrower consider a second mortgageprivate loan, vs a first mortgage private loan?
The short answer is it depends on the scenario!
Instances where second mortgage loans are warranted?
- The loan duration is very short, where the cost of the second mortgage loan, is cheaper, than refinancing the whole loan as a private first mortgage or bank loan.
- Where the second mortgage loan amount is small compared the primary first mortgage with the bank and it makes sense that the combined cost of both (the second mortgage loan and the bank loan) is cheaper than a first mortgage refinance.
- The inconvenience solved, by the second mortgage loan and its immediate delivery of funds is greater than the financial cost.
- Where funds are required urgently, and quicker than what a bank can provide them in, to solve a problem or take an advantage of an investment opportunity.
- Where the bank has denied the borrower additional equity release due to bank covenants.
- Where the bank will take too long to discharge their loan, for a refinance and further equity release, so a caveat loan is used.
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