With the mortgage market in a downturn, the second mortgage market could provide untapped opportunities for brokers across a broad range of asset classes, according to a broker and a private lender.
“While second mortgages often come with higher interest rates than first mortgages, they are still a suitable short-term solution for borrowers with specific business needs,” said Rob Kirk (pictured above left), commercial broker for Equity Lenders.
“For brokers, second mortgages are an extremely valuable tool to help clients access the equity in their homes for business use while maintaining their existing mortgage arrangements.”
The weak appetite among new homebuyers has steadily created a highly competitive environment for brokers to operate in.
New home sales over the three months to July 2023 were down 33.4% from last year, according to recent data from the Housing Industry Association (HIA).
“I hate to say it, but the mortgage broker market has hit a slump,” said Gee Taggar (pictured above right), private lender at Archer Wealth. “And this reflects the broader economic uncertainty we’re experiencing across Australia.”
“A total of 158 brokers told my team in the space of a week that they were receiving little to no enquiries from borrowers. Another 74 told us that business was slow.”
Taggar put this down to three main reasons – scared consumers, soaring interest rates, and stringent lenders.
Firstly, consumer confidence has dwindled as the cost-of-living crisis deepens.
“As a result, borrowers have become much more conservative in their spending, holding off on making big financial decisions like taking out mortgages,” Taggar said.
Secondly, 12 rate rises in just over a year has further discouraged borrowers from entering the market. Taggar said many borrowers were holding out for a return to the “good old pandemic days” of 2% interest rates.
“I hate to be a buzzkill but that just won’t happen any time soon,” he said.
Finally, banks have become strict when it comes to lending money.
“They’ve put in place some very stringent criteria that have resulted in borrowers, who used to have no problems getting loan approvals, simply not being able to borrow money anymore,” Taggar said. “Unfortunately, this has all reduced the pool of potential customers for brokers.”
Despite this uncertainty, Taggar said second mortgages had become “a bit of a silver lining” in the broker world.
“Second mortgages can provide access to funds for business use or expansion, commercial debt consolidation, property development, and a whole lot more. All without having to refinance an existing mortgage,” Taggar said.
“This can be massively appealing for those who already have a fixed-rate mortgage at a lower interest rate and do not want to refinance at the current higher rates.”
Kirk agreed and listed three examples where a second mortgage could benefit borrowers.
“This may be because they have a poor repayment history, the value of the security does not allow for a higher loan amount or the customer’s salaried income is insufficient,” Kirk said.
“Banks and other lenders can often take weeks or even months to loan variations.”
“For example, the customer may need to enter a contract before they have sold their existing property,” Kirk said. “They have available equity, however; their lender does not want to assist because the second property value plus their current servicing equals too much risk for them.”
Kirk said he experienced this first-hand last week where a property owner in Canberra sought a business loan using equity from her existing property to buy a new one.
“Her business was flipping prestige properties that are dated by renovation. She can make several hundreds of thousands of dollars on one property flip,” Kirk said.
Her long-term bank rejected her due to her self-employed finances, suggesting a six-month wait before being considered.
“The customer approached a prominent broker firm to find a non-bank lender that could assist. They were unsuccessful. None of the banks were interested,” Kirk said.
“Our funder, however, was immediately able to offer the requested loan. A combination of prepaid interest and an accountants’ letter confirmed her ability to make monthly interest payments.”
Given her business’ potential for growth, Kirk said the higher interest rate and the cost of a loan secured by a second mortgage was of no concern to the purchaser.
“Ultimately, the second mortgage she secured helped her obtain her new investment property – setting herself up to make a huge return on her investment well exceeding the amount of interest she had to pay on her second mortgage.”
Some brokers may be nervous about offering their clients a second mortgage.
This is understandable given that second mortgages are often four times more expensive than a regular home loan.
However, Kirk said in an uncertain market, the benefits considerably outweighed these costs.
“There are many ways brokers can convey the benefits to second mortgages, and we encourage them to contact us if they are unsure how this type of loan can help a particular client,” Kirk said.
