Is a Second Mortgage a Good Investment Strategy?

If you’re looking for capital to expand or diversify your investment portfolio, one of the options that may be available to you is a second mortgage. This is a home loan that you take in addition to, but separate from, your existing mortgage. You borrow money against the equity you’ve built up in your home, then use that money to invest.

But is a second mortgage a good investment strategy? While it provides a good source of leverage for your investment, it also comes with certain risks.  

At PSA Capital Investments, we offer sophisticated investors an opportunity to earn high and stable returns through our low-risk private credit fund. Here’s what you need to know if you’re thinking about a second mortgage as an investment strategy.

Second Mortgage vs. First Mortgage: What’s the Difference?

A first mortgage is the primary home loan that’s secured against the property.

• It has priority lien, meaning the first mortgage lender is paid first when the property is sold after a default.
• This makes it a less risky option for lenders, and thus it typically has lower interest rates.
• Lenders offer longer repayment terms, sometimes up to 30 years.
• Borrowers don’t have flexibility over what they can do with the loan. First mortgages are limited to buying property.

After taking out a first mortgage, your home will accrue more equity over time as you make loan repayments and your home goes up in value. Home renovations can also boost your home equity.

After some time, you can borrow a second loan against the built-up equity of your home. That is, the difference between your current home value and the remaining loan amount in your first mortgage.

This is a second mortgage. Say, for example, your home is currently worth $700,000 and you have $200,000 left to pay in your first mortgage. You can apply for a second mortgage against your home equity of $500,000.

How much money you can get depends on a lender’s loan-to-value ratio (LVR). In many cases, lenders require that the combined first and second mortgages not be more than 80% of your home’s value.

In the above case, that would mean that the total loan amount should be $560,000 (80% of $700,000). With $200K left in your primary mortgage, the max you can get for a second mortgage is $360,000. But remember the LVR, and thus the loan amount, can vary among different lenders.

A second mortgage:

• Has higher interest rates since lenders face a higher risk. In case of a default, the second mortgage will be paid last.
• Has a shorter repayment period between 1 and 20 years.
• Offers more flexibility over what you can do with the money.

Is a Second Mortgage Investment a Good Idea?

You can use the money from a second mortgage as leverage to build wealth. It’s risky and requires careful weighing of your investment options to minimise risk and maximise returns.

For example, you can get a second mortgage to fund the purchase of an investment property with the hope that it brings enough returns (via rent or profit after a sale), to repay your second mortgage.

Other options include buying stocks or investing in a private fund.

When deciding whether a second mortgage investment is a good idea, consider the following factors:

• How much debt will I have overall, including the first mortgage, the second mortgage, and any other debts (e.g. if you take out a loan on an investment property)? Will you have enough cash flow to service all those debts?
• How much money you can borrow against your home equity. The loan size will determine what investments you can make.
• The risk-return balance of a particular investment. Higher returns are great, but not if the risk is too high.
• What’s the ROI on your investment compared to the interest you’re paying on your second mortgage? This makes certain low-return investments like bonds less than ideal.  

We highly recommend consulting a financial advisor to help you figure out whether a second mortgage is a good option for you and the best investment to put the money in.

Enjoy Low-risk, High-return Second Mortgage Investments With PSA

At PSA, we offer low-risk investment options that deliver stable returns of around 8% per annum with quarterly distributions. If you’re looking for a second mortgage investment strategy that generates good returns while protecting your capital, we can help.

Contact us on (03) 9847 7689 to explore your second mortgage investment options.

Disclaimer: The information contained in this document is of a general nature only and has been prepared without taking into account your objectives, financial situation or needs.