Is a second mortgage for you?

Using a second mortgage to unlock the equity in a home is helping people start a business, overcome a rough patch, or buy something they've always wanted.

Second mortgages were all the rage in the 1980s.

Borrowing all you need on a first mortgage has become much easier and second mortgages are no longer a topic of discussion for the water cooler.

But there's still a time and a place for "simple seconds", says William Cairns, director of mortgage provider General Finance.

The second mortgages are secured against the home. Usually they're provided where there is a reasonable amount of equity in the home, or the bank won't lend.

A common example, says mortgage broker Stuart Wills of Mortgage Link in West Auckland is a home owner who has fallen on short-term hard times. They may have lost their job and need to refinance personal loans on to their mortgage. A second mortgage tidies up those loans and may clear up arrears on the first mortgage. It often means the homeowner paying less overall on their debt.

As well as keeping the wolf from the door for some people, it's also not uncommon to get a second loan against the family home to finance a new business, says Wills.

"They may be six months away from having their financials ready [to apply for a bank loan]."

That was exactly the case for one recent borrower, says Cairns.

"We approved a loan on a property valued at $1.2 million [and] provided a short-term second [mortgage] of $150,000 for 12 months behind the first mortgage of $440,000 to allow the borrower to acquire a franchise."

Another example Cairns sees from time to time is a double income family where one is temporarily out of work but they see their dream boat or car and want to borrow against the house to buy it, knowing they will be able to pay it back. People nearing retirement may have difficulty borrowing from the bank to renovate a rental property. The answer for them may be a second mortgage.

As well as General Finance, other lenders in this market include Avanti Finance, MahiCapital, Gold Band Finance, Plus Finance and others, says Wills.

Most charge fees ranging from $500 to $1500 to set up the loan and between 10 per cent and 18 per cent interest.

The costs are higher than a regular mortgage. If, however you're borrowing to set up a business or do work on a rental property, for example, those costs become tax deductible, says Wills.

Both Wills and Cairns say that, typically, a second mortgage is a short-term solution. It would be almost inconceivable that a homeowner holds such a mortgage for 25 years. It's more likely someone takes a second mortgage out in the knowledge that they'll be "bankable" in six months, says Wills.

He adds that Mortgage Link is always careful to ensure that borrowers' situations meet the standards of the Responsible Lending Code.

"We [need] to know there is an exit at the end of it. If they are going to be stuck with it for years, it becomes uneconomic."