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Why should you apply for a 2nd Mortgage Loan?

Do you have financial problems such as overdue taxes, unpaid business debt, or other business related debt that needs consolidation? You can solve most of these issues by securing a loan. It is often difficult for borrowers to meet the eligibility requirements of traditional lending institutions like banks. There can be many reasons for this, like affordability, credit issues, or the purpose of the loan.

There are different types of loans available in the New Zealand financial market. Each type of loan is suitable for different situations and needs. What are the right circumstances for a 2nd mortgage loan, and why should you apply? Let’s find out!

What is a Second Mortgage?

A second mortgage is a subordinated mortgage acquired while the original first mortgage is still outstanding. In case of default, the original mortgage will receive all proceeds from the liquidation of the property until fully repaid, and the second mortgage will be paid from the surplus.

For example, you buy a house for $400,000. You pay a 20% deposit payment of $80,000 and borrow $320,000. You decrease the balance to $250,000 over time. Now, you apply for a second mortgage. The new estimates put the house value at $525,000.Your home equity is your home’s current market value minus your debt, in this case, $275,000.

So how much home equity can you leverage? Often 75%, is the maximum lenders will advance to. Assuming you borrow 75% of your equity, you can get a loan using this equity of approximately $118,750. Once the loan is approved, the lender will register a mortgage on your property. This second mortgage has different repayment structure than your current first mortgage loan.

How does a Second Mortgage work?

What does it mean to take a second mortgage? When most people buy a home or property, they take out a mortgage from a lending institution with the property as security. This loan is called a mortgage or, more specifically, a first mortgage. Borrowers must repay the loan in monthly installments of the principal and a portion of the interest. Over time, the home’s value will increase as homeowners make their monthly payments appropriately.

The difference between the current market value of the home and the remaining mortgage payment is called Home Equity. Homeowners may borrow against their home equity to fund other projects and expenses. The loan they are taking on the house is the second mortgage, as they already have the first mortgage outstanding. The second mortgage is a lump sum paid to the borrower at the loan term starting.

Like the first mortgage, the second mortgage must be repaid over a period at a fixed or variable interest rate based on the loan agreement with the lender. The borrower has to pay this loan off before getting another loan.

How to use a Second Mortgage?

There are many ways people can use these loans. Some of these are:

1. Temporary cash flow issues

If your business has unexpectedly experienced cash flow issues, getting a 2nd mortgage loan is the key to assist your business to continue trading. You can use the funds for any business issue experienced by a temporary cash flow issue.

2. Renovation of commercial properties

You can achieve significant cost savings by using equity available in properties as security for commercial properties. Equity in any available property can be used to assist with renovations or even a purchase of a new commercial property. You can use these loans as the best bridging loan also.

3. Start a business

Taking out a second mortgage as a fast business loan is quite common. It is much quicker and easier than preparing your company’s finances individually. Some lenders will not assist with start up businesses without having any security to offer. A second mortgage can help you set up a new business quickly and easily by using the available equity.

4. To qualify for a traditional mortgage

You can also use a second mortgage to assist with the deposit payment on any commercial investment property. New Zealand mortgages are subject to regulations and lending standards to protect the economy’s long-term health. It means you must save at least 20% down payment to qualify for a mortgage. Also, if you can find a lender who will lend you up to 90%, you will likely face much higher interest rates.

But you find a commercial investment and only have 10% of the deposit payment. A second mortgage to cover the shortfall could be the solution. It allows you to qualify for a traditional for 80% of the mortgage and save you the excessive fees, insurance premiums, and interest rates that come with a 90% mortgage.

Why should you apply for a Second Mortgage?

You can apply for a second mortgage due to the following reasons.

1. Financing and Flexibility

A second mortgage is a popular financial product because it often allows you to access more funds than an unsecured loan. Some lenders let you borrow up to 75% of the value of your home, less your current first mortgage debt. With a home equity credit facility, you have the funds when needed.

2. Favorable interest rate

Another reason to take out a second mortgage is that these loans often have lower interest rates than other loans and credit cards. Because the house secures the mortgage, the interest rate is lesser than credit cards and many other fast business loans.

End Thoughts

A second mortgage can provide funding for any worthwhile business purpose such as cash flow, stock purchase or pay any unexpected expense. Many people consider getting a 2nd mortgage loan because of its usage flexibility. Consider how you will spend the money you borrow. It is best to invest that money in something that will improve your net worth in the future. A plan will help you repay the loans within an adequate time frame.

The Terms Related To Short-Term Business Finance That You Should Know

Every one of us can be in a financial crisis at some point or the other. Borrowing money may be a way out. You can borrow funds to finance your business, start a company, buy equipment, or for any other worthwhile purpose.

When you apply for a 2nd mortgage loan or any other funding for the first time, you may encounter several new words that you have never heard before. Phrases like assets, collateral, APR, working capital, and many more like these can form financial jargon. Today, we will be exploring this jargon and help you learn some loan terms that you should be aware of.

Terms related to Short-term business finance

Let us look at the terms that you should have an idea about before applying for business finance.

  • Collateral

Collateral is an asset that the borrower pledges as security for repayment of a loan. This asset is forfeited if the borrower does not repay the money.

  • Secured Loan

It is a financial product where the borrower pledges collateral. It can be any acceptable asset such as a house, car, land, or motorcycle. The lender has the full right to seize that asset in the event of a payment default. Traditional institutes like banks and some private financial institutions offer secured loans.

  • Unsecured Loan

Unlike a secured loan, here the borrower does not have to use any assets like a vehicle or property as collateral for getting business finance in NZ. So this financial product is for all those who do not wish to provide assets as collateral for a loan.

  • Short-Term loan

It is a loan with short repayment terms. The loan term varies between 3 to 18 months, depending on what the client and lender select.

  • Long-Term Loan

A loan that has an extended repayment period is a long-term loan. The repayment tenure can vary from 12 months up to 30 years, depending on the amount borrowed and needs of the client.

  • Business Credit Card

Another term you must be aware of if you are applying for 2nd mortgage loan is a business credit card. It is similar to personal credit cards. The only difference is that it is designed specifically for business or work requirements. You cannot use it for personal expenses.

  • Invoice Financing

Invoice financing is also known as receivables financing. In this financial term, the lender allows the borrower to use the money owed as a loan asset. This way, they can get paid for outstanding invoices right away. Since you are using your remaining invoices as collateral for the loan, it is a secured short-term business loan.

  • Business Microloan

A business microloan is a loan product with a small loan amount, ranging from $100 to $50,000. The repayment schedule is also shorter.

  • Equipment Financing

This is a business loan that aims specifically at business equipment purchases. To get what you need, simply use any existing equipment or the asset you want to purchase as collateral.

  • Line of Credit

A line of credit means that you have a limit of available funds and draw and re-pay funds into the loan as your needs change. You only have to make payments based on the credit that you have used.

  • Merchant Cash Advance

This short term business finance product is designed for retailers receiving a high payment proportion via EFTPOS or credit cards, such as cafes, shops, and restaurants.

  • Overdraft

An overdraft is a type of business loan. It is connected to the existing bank account of the user. This type of loan works similarly to a line of credit with a credit limit allowing you to spend more money than you have put into the account.

  • Asset

An asset is an item of property that a company or an individual owns. It has some significant value, for example, a car, real estate, or a piece of equipment.

  • Traditional Lender

Another common term in business finance in the NZ dictionary is a traditional lender. This term refers to financial institutes like banks known as financial providers traditionally.

  • Alternative Lender

An alternative lender is also known as a non-traditional lender. This term describes a company that aims to work outside the traditional business financing model. They utilize real-time data and technology to achieve this, making the application procedure and acquiring loans much easier.

  • Accounts Receivable

In relation to a the 2nd mortgage loan, accounts receivable refers to the money owed to a company by its debtors.

  • Accounts Payable

This refers to the money owed by a company to its creditors.

  • Cash Flow Statement

A cash flow statement is a financial statement measuring the cash generated or used by a company in a particular tenure.

  • APR

APR stands for Annual Percentage Rate. Although it is not the same as the interest rate, APR measures the cost of a mortgage over a one-year term.

  • Blanket Lien

The blanket lien gives a lender the right to seize in the situation of non-payment. They can capture all the assets served as collateral by a debtor.

  • Fixed Interest Rate

This interest rate remains the same for the entire loan term and is known as a fixed interest rate.

  • Variable Interest Rate

A variable rate of interest fluctuates over time based on the market conditions.

  • Entity Type

It refers to your business structure like a sole trader, Pty Ltd, Limited, etc.

  • Loan Agreement

A loan agreement is a contract between a lender and a borrower that contains all of the loan details.

  • Maturity

Refers to the final payment date of the loan.

Conclusion

So, these are some of the business finance NZ terms that you must be aware of. If you are interested in any more loan terms that you are unaware of, comment below, and we will try to answer them. Thanks for reading our blog!

HomeSec Business Loans New Zealand

152 Fanshawe St,
Auckland, 1010, New Zealand
​09 888 6550
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Monday to Friday (excl Public Holidays)
​ HomeSec Business Finance Limited
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