The blended cost of a second mortgage, explained

The objection every borrower raises

When people hear “second mortgage” they hear “expensive”, and on its own that is true. A second mortgage is priced above a bank first mortgage because the lender ranks behind the bank. So many borrowers rule it out, and refinance everything with a single private first mortgage instead. Sometimes that is right. Often it is not, and the reason is arithmetic.

What a second mortgage is a share of

Take a property worth $1,000,000 with an existing bank first mortgage of $600,000. A second mortgage of $150,000 takes the total debt to $750,000. The second mortgage is $150,000 of $750,000, which is exactly 20% of the debt. The other 80%, the bank loan, keeps its existing terms.

That is typical. Second mortgages are usually a modest slice of the property’s total debt, because lenders limit the combined borrowing, and the equity left behind a first mortgage is rarely large.

Now look at what each choice means:

• Keep the bank loan and add a second mortgage. Four-fifths of the debt stays at the bank’s price. One-fifth is priced at the second mortgage price.
• Pay out the bank with a private first mortgage. All $750,000 is priced at the private first mortgage price, which is generally higher than a bank’s.

The higher price on a small slice can cost less than a slightly higher price on everything.

The weighted average, in plain words

The blended cost is the average price of all your debt, weighted by size. You do not need rates to see the logic. Imagine the bank loan is priced at a base level, the second mortgage costs a step above that, and the private first mortgage costs a smaller step above the base level. If the second mortgage’s extra step applies to only a fifth of the debt, while the private first mortgage’s extra step applies to all of it, the second mortgage option can easily be cheaper overall. It stops being cheaper only if the private first mortgage premium is small, or if the second mortgage is a bigger part of the total.

That is why it pays to compare real quotes. Our blended cost calculator takes the figures from your own offers, so no rates are assumed, and shows the blended result side by side.

Other things that tip the balance

Costs to refinance. Paying out a bank can mean break costs, discharge fees and a new set of legal and establishment fees. A second mortgage leaves the first loan untouched, so those costs do not apply.

Time. Replacing a bank loan involves more steps than adding a second mortgage. If speed matters, the second mortgage is usually faster. A bank’s consent may be needed, and a caveat can bridge the gap.

Features you would lose. A fixed rate, an offset account or a redraw facility on your existing loan may be worth keeping.

Term. A private first mortgage may give a longer, calmer runway. If you need several years, the cheaper long-term route may be the better fit. See longer-term private loans.

When a private first mortgage does win

A private first mortgage is the right answer when:

• There is no existing loan, so there is nothing to blend with.
• The existing lender is in default and calling in the loan.
• The bank loan is already expensive, so there is little saving to protect.
• The second mortgage would be a large share of the total debt.
• You want one lender, one set of terms and one exit.

Our page on private first mortgages covers those situations.

How to run the comparison yourself

1. List the balance and cost on your existing loan.
2. Get a quote for a second mortgage on the extra amount.
3. Get a quote for a private first mortgage over the whole amount.
4. For each option, calculate the total cost in dollars over the time you expect to hold the debt, including fees.
5. Compare the totals, not the headline prices.

Do not forget the exit: whichever route you pick, you must repay the private lender, usually in one amount. Test it with the exit plan checker.

Why we lean to second mortgages

On a desk that handles urgent secured loans every day, second mortgages behind a cheap bank loan are often the best fit for borrowers who need money quickly and plan to repay it soon. They are fast, they do not disturb your existing loan and, as the figures show, they are often cheaper overall than they look. That does not mean they are right every time, which is why we compare both on your numbers.

A simple illustration without any rates

Picture three bars side by side. The first shows the property at $1,000,000. The second shows the debt if you keep your bank loan and add a second mortgage: $600,000 sitting at the bank and $150,000 at the second mortgage lender. The third shows the debt if you pay the bank out and take a private first mortgage: one block of $750,000. In the second bar, only the small top block carries the higher price. In the third, the whole bar does. That picture is the whole argument, and you can test it with your own numbers in the calculator.

Start your enquiry

Tell us the property, what is owing and how much you need. There is no credit check when you first enquire, and a person on our desk will show you the options side by side. Start your enquiry.