Are two home loans with one lender a good idea?
5 min read
Getting a second home loan can be a big choice. Should you do it with the same lender, or a different one?
With a property already under your belt, you might be thinking about your next move. Whether that’s securing an investment property or giving a family member a leg up in the property market, there is a range of scenarios when you might consider taking out a second home loan.
As an alternative to refinancing, a second home loan comes with a stack of things to consider before you take the plunge. While it can give you easy access to the money tied up in your current property, it can be a risky move (especially if you don’t have a good savings buffer and solid cash flow plan).
Let’s run you through what you need to know about taking out a second home loan, the pros and cons to weigh up and whether it’s a wise move to have two loans with one lender.
As the name suggests, a second home loan involves taking out a second mortgage and using your current property as security. Essentially, it means paying off two home loans at the same time.
In the eyes of your lender, your first mortgage is ranked ahead of your second home loan. That means that if you default on either mortgage, your original property would be sold and used to pay off your original mortgage first, then your second mortgage.
Still confused? Here’s a helpful example of how this could play out:
Let’s say you currently have a home loan for $400,000 (Loan A).
You decide to take out a second home loan for $400,000 against the same property (Loan B, a.k.a. Your second mortgage).
You’re not able to pay back your loans and your original property is sold for $700,000.
That means Loan A would be repaid in full, while there would still be $100,000 outstanding on Loan B.
This is the big risk of a second home loan: it involves taking on lots of debt that you might not be able to repay if things don’t go to plan.
In most cases, refinancing is a lower risk option to help someone purchase their next home or investment property. But refinancing doesn’t suit everyone. If you’re locked into a fixed-rate loan or can’t find a lender that will approve your new loan amount, you might be considering other options.
That’s where a second home loan can come in. It can help you tap into the equity in your current property, and allow you to make your next move quickly.
Here are a few reasons why borrowers might think about a second home loan:
It can help you access the equity in your current home.
Taking out a second loan can help you pay off or consolidate your debts.
A second mortgage can give you the cash you need to renovate or repair your existing property, and potentially increase the value of your home.
In short, absolutely. In some cases, borrowers choose to stick with their current lender when securing a second loan.
Some of the benefits of taking out two home loans with one lender include:
A quicker, easier application process as the lender already has your details on file.
Some lenders may offer an interest rate discount for borrowers who take out multiple loans with them.
It can be more convenient to make repayments and check the status of your home loans if you’re working with the same online banking platform.
However, there are risks you need to consider before deciding to take out a second loan with the same lender, including:
It puts all of your eggs in one basket and can increase the risk if you fall behind on repayments or default on your loan.
Your lender knows about and has access to your entire property portfolio, making it easier for them to recoup their losses if you default on one of your loans.
Two mortgages mean you’re taking on more debt and managing the complexities of two home loans at once. If you’ve got good cash flow and enough money to service both loans, it can be a practical way to access money to fund repairs, renovations or new property purchases.
It’s a wise move to ‘stress test’ your budget before taking on a second mortgage (and plan for things like interest rate increases).
We’ve got a handy home loan repayment calculator to figure out how a second loan might impact your cash flow. Plus, check out our borrowing home loan calculator to get an upfront estimate of your borrowing power.
Taking on another home loan can be a risky move if things go pear shaped and you’re unable to keep up with your repayments. So, it’s important to have a good buffer of savings and a stable source of income before considering this type of loan.
Taking out two loans with the same lender can make it quicker and easier to secure a second mortgage. That’s because the lender already knows who you are, which can shorten the time it takes to secure approval (as they have your documents already on hand).
But just because you can secure a second mortgage from the same lender doesn’t necessarily mean you should.
By having all your loans with one lender, you heighten your risk if your financial position changes and you fall behind in your repayments. By using your home as security for a second loan (and the bank having access to your new property, too), you could end up losing both if you default on your loans.
Plus, different lenders can have different criteria for borrowers. So, using different lenders may allow you to borrow a higher amount (rather than sticking with your current lender).
Absolutely. By tapping into your home’s equity (a.k.a. the difference between what it’s worth and what you currently owe on your loan) you can secure your next property faster. That’s because this equity can be used to put down a deposit on a new home or investment property.
To access the equity in your current property, you’ll need to do a ‘cash-out refinance’. It involves refinancing your loan to increase the total loan amount. Then, you can use this extra cash to pay the deposit of your next home or investment property.
Ultimately, taking out a second home loan is a decision you need to consider carefully. While it can help you purchase your next property sooner, it can put you at big financial risk if you’re unable to keep up with your repayments.
Plus, taking out both loans with the same lender can increase your chances of losing both properties if you default on either loan.
Want to find out more about which type of loan is right for you? Chat to our team of real humans based at Tic:Toc HQ in Adelaide to find out more.
Lucinda Starr is Head Copywriter and Founder at Starr Studio. Previously, she's worked as a Content Manager, Social Media Strategist and Writer for Broadsheet, Concrete Playground, BuzzFeed Australia and beyond.