The short answer
People take out a second mortgage when they need money that their property equity could support, but they do not want to change, or cannot change, the mortgage they already have. The first mortgage stays exactly as it is. A second lender lends against the equity left over and registers its own mortgage behind the first one.
The most common reasons are speed, keeping a good first mortgage in place, avoiding a break fee, and borrowing for something the main bank will not fund, such as a business need. The trade-off is that a second mortgage usually costs more than a bank mortgage, and the property is security for both loans.
A second mortgage is not a mortgage on a second home
The names are easy to mix up. A second mortgage is a second loan secured against a property that already has a mortgage. A second home mortgage is an ordinary mortgage used to buy a holiday home or another house. If you are buying a second home, a bank or a mortgage adviser is the right place to start. HomeSec does not lend for that.
How a second mortgage works
- Your first lender stays in place. Your bank keeps its mortgage, its rate and its term.
- A second lender lends against the remaining equity. That is the property's value less what is owing on the first mortgage and any other lending.
- The second mortgage ranks behind the first. Under the Land Transfer Act 2017, registered mortgages rank in the order they are lodged, unless the lenders agree otherwise. If the property is sold, the first mortgage is repaid first.
- The first lender may need to consent. Many bank mortgages require the bank's consent before another mortgage is registered. A good second lender checks this early.
- It is repaid from a clear source. Usually a property sale, a refinance into one larger loan later, or business cash flow.
Why people take out a second mortgage
- To keep a first mortgage worth keeping. If your fixed rate is good or your term suits you, a second mortgage lets you borrow more without touching it.
- To avoid the cost of refinancing. Sorted, the government-backed money guide, notes that breaking a fixed rate can mean a break fee, and switching lenders can also bring discharge, legal, valuation and application costs and the repayment of any cash incentive. A second mortgage leaves all of that alone.
- Speed. A second lender looks mainly at the property, the purpose and the repayment plan, so it can often decide far faster than a full bank application.
- The bank has said no, or not yet. Banks often decline business lending when accounts are behind, trading history is short or there is tax debt. A second mortgage can fund the need while those things are put right.
- A separate loan for a separate purpose. Keeping a business loan apart from the home loan makes it easier to track, and easier to repay in one go when the money comes in.
- A known end date. When repayment will come from a sale, a refinance or a payment the business is owed, a second mortgage can bridge the gap until then. Our guide to how bridging finance works explains this kind of lending.
Common business reasons
- Paying an IRD debt, or setting it up properly, before penalties and interest build further. See IRD tax debt loans.
- Buying stock, equipment or a fit-out ahead of a busy season or a big contract.
- Covering a gap while a large customer payment, a sale or a refinance comes through.
- Buying a business, a share in one, or a competitor's customer list.
- Repaying a more expensive or more demanding lender.
Second mortgage, top-up or refinance?
- A top-up with your bank is usually the cheapest way to borrow more if the bank agrees and you can wait for its process. Ask first.
- A refinance replaces your first mortgage with a new, larger loan, often with another lender. It can suit long-term borrowing, but brings the costs above and a full new application.
- A second mortgage adds a separate loan and leaves the first one alone. It suits a specific need, a faster timeline, or a situation the bank will not fund right now.
- An unsecured business loan needs no property, but amounts are usually smaller and lenders lean heavily on trading history. Our guide to unsecured business loans compares them honestly.
The risks to weigh
- Cost. A second lender takes more risk than the first, so a second mortgage usually costs more than a bank mortgage. Compare the total you will repay over a realistic timeline. Our guide to business loan interest rates sets out what to check.
- Two loans on one property. Both lenders can enforce their mortgages if the loans are not repaid. Be confident in the plan before you borrow.
- The repayment plan slips. If a sale takes longer or a refinance is declined, interest keeps building. Plan for a delay, not the best case.
- Fewer consumer protections. Credit used mainly for a business purpose is generally not a consumer credit contract, so many consumer lending rules will not apply. Have a lawyer review the contract before you sign.
Before you apply
- Write down the amount, what it is for and when you need it.
- Find your first mortgage details: the lender, what is owing and whether its terms require consent for a second mortgage.
- Have the property details ready: the address, who is on the title and an estimated value.
- Decide how you will repay it, and what happens if that takes three months longer.
- Ask your bank about a top-up first, so you can compare.
Where HomeSec fits
HomeSec is a direct, privately funded New Zealand lender, not a broker. We lend $20,000 to $1,000,000 for genuine business purposes on open-term facilities, secured by a first or second mortgage over suitable residential or commercial property almost anywhere in New Zealand. Open term means the loan does not have to be repaid by a fixed early date, and you can repay at any time.
We do not lend to buy or renovate your own home, to buy a second home, or for personal spending.
No valuations or cashflow records are needed to start an enquiry. Funding may be possible in as little as 24 hours once assessment, documents, security, legal work and settlement line up, and approved facilities may offer up to six months with no scheduled payments. Interest still accrues during that time, and approval is never guaranteed.
See how HomeSec second mortgages for business owners work, including first-lender consent and repayment.
Common questions
Why would someone take out a second mortgage instead of refinancing?
To keep a first mortgage they are happy with, to avoid a break fee and the costs of switching, to get funds faster, or because their bank will not lend for the purpose right now. A second mortgage adds a separate loan without changing the first.
Do I need my bank's permission for a second mortgage?
Often, yes. Many bank mortgages require the bank's consent before another mortgage is registered on the property. The second lender usually checks your first mortgage terms and arranges this with you.
Is a second mortgage a good idea?
It can be when the purpose is worthwhile, the amount is right and the repayment plan is realistic. It is a poor idea if the plan to repay relies on hope, or if a cheaper bank top-up is available and you can wait for it.
Can I get a second mortgage with bad credit?
Possibly. Second lenders look mainly at the property, the purpose and the repayment plan. Tell the lender about any defaults, arrears or tax debt upfront. Our page on business loans for credit or tax problems explains how HomeSec looks at this.
How quickly can a second mortgage be arranged?
With HomeSec, funding may be possible in as little as 24 hours, subject to approval, documents, security, legal work and settlement requirements. Your first lender's consent can add time, so raise it early.