Second Mortgage: Why Would I Need One?

A second mortgage means exactly what it says. If you take out a second mortgage, you take out an additional mortgage on a property that already has a mortgage. Of course, there needs to be equity in the property. That is, it needs to have increased in value since the first mortgage was taken out.

There is usually only one reason for taking out a first mortgage – that is to buy your property. But now you already have the house, you want to take advantage of the money that’s tied up in it. There could be all sorts of different reasons for looking for a second mortgage.
• One of the most common reasons is to consolidate debt, or just as a means of reducing your outgoings by rolling up amounts you owe such as credit card balances and other loans. This can help you budget by having only one monthly payment instead of several, and this could well be at a lower interest rate. If you are having problems with arrears, it can help you improve your credit rating.
• The other very common reason for taking out a second mortgage is to improve your home. Lenders like to lend for home improvements because it makes their security more valuable. For this reason, you may find you get more favourable interest rates.
• A second mortgage can be a good way of helping you buy a second home, as an easier alternative to getting a mortgage on the new home. Of course, you would have to have a huge amount of equity in your property for the second mortgage to be enough to buy the second home completely, but at least it can provide a good deposit.
• Many people use a second mortgage to pay school fees, or to fund their children’s university or college education.
• One good reason for looking for a second mortgage is to fund a new business start-up. It certainly beats going cap in hand to the bank manager, who usually takes a lot of convincing that your idea is viable. It is true that a lender of a second mortgage would ask more questions in this situation, but because of the security the lenders have, it is still easier than getting a bank loan.

There are plenty of reasons for taking out a second mortgage. The extra equity in your home is there – why not take advantage of it?

Sean Horton is a Director of Enhanced Wealth Limited who are a specialist mortgage broker offering second mortgages