Understanding Second Mortgage Home Loans

Do you need extra financing urgently but personal loans are way over your budget? Here’s a way out. The trend of taking second mortgage home loans is fast catching up among borrowers, owning to the ease of processing and the several ways in which it can be used. Its faster than taking personal loans and can help you get a larger loan as its against a verified property. In cases where borrowers may not have any additional security to offer, second mortgage loans come in pretty handy.

What is a Second Mortgage?

Also known as top up loans, second mortgage loans are an additional loan against a property which is still under mortgage with another or the same lender.  You can use the loan for various purposes like:

1. Paying off existing debts
2. Home improvements
3. Funding other property purchases
4. Making other investments
5. Covering personal expenses

Second mortgage home loans are preferred by many over personal loans as they have a lower interest rate and can be easily processed if taken from the same bank, from which you have taken your existing home loan. For example, Mr. Bakshi took a home loan of Rs. 50 lakhs from SBI to purchase a property, in 2012. So until he repays the loan, the property will remain mortgaged with SBI.  Recently, he wanted to borrow an additional 8 lakhs for renovating his home.  So instead of going for a personal loan he took a second mortgage loan from SBI itself. This means that until he pays off both the loans, the property will remain mortgaged with the bank.

How is a second mortgage loan repaid?

A second mortgage home loan is treated like any other loan and needs to be re-paid along with your existing home loan. To disburse this loan, the bank will open a separate loan account for which it will deduct EMIs separately from your specified savings account.

What happens if you are unable to repay the loan?

If due to any untoward circumstances you default on your loan repayments, the bank will recover your home loan payments first. If the bank decides to sell your property to recover dues, then it will recover dues for both loans and additional funds (if any) will be handed over to you.

Are there any risks involved in taking top-up loans?

Borrowing money always has a certain risk factor involved owing to the possibility of default payments. So by taking an additional loan on a property which has already been mortgaged for an existing loan, you add on to your liability. Further you may have to pay a hefty processing fee and the interest rate will be slightly higher than your existing mortgage loan. Such loans are appropriate for times when you need a lot of money urgently.  So before you go for a second mortgage, do ask the following questions:

Do I really need the money?

It’s best to take a second mortgage loan only if you have a long term need. For short term requirements, you may want to consider diluting some small short term investments or borrowing from a friend if you can. This will not only save you from paying additional interest, but will also prevent you from putting additional burden on your property. However on the flip side, don’t forget to compare the interest you will save on loan vis-à-vis the interest you are earning on your investments.

Do I have the financial backing to repay both the loans successfully?

Since you are taking an additional loan, you will be increasing you monthly payment burden. So before you go for it, it’s advisable to do a check of your immediate financial situation, you’re expected disposable income in the near future and your financial goals. This will help you plan your loan better.

How will the bank decide if you are eligible for a second mortgage?

Banks are always happy to give additional loans to existing borrowers as it means more business for them. However, not all borrowers may be considered eligible. Here’s what the banks look for before giving you a top-up:

1. Your disposable income: The bank will make sure that you have the repayment capacity to pay 2 loans.
2. Property’s value: If your property’s value has gone up since you took a home loan, the bank may be willing to give you a top-up loan for a larger amount.

Though it can be tempting to tap a large source of money with a second mortgage, it’s advisable to do so only if necessary, as you are borrowing against your home.

Taking second mortgage loan from another bank

One of the biggest myths about second mortgage loans is that it can be taken only from the bank from which you have taken your existing home loan. THIS IS NOT TRUE. Though most borrowers prefer to take a top-up from their existing bank as it is easier and faster, its advisable to go for a second mortgage with another bank is you are getting a better offer. So how does this work? A second mortgage implies that the first lender will have priority over the asset mortgaged. This means that if you default on your payments, the first lender will realize his dues first, only then the second lender will be able to get his dues. So here, both the lenders share rights in the property in accordance with proportions So in the event of non-payment of dues, the first lender will realise his dues first, and only then the second lender will be able to realize his dues. This means, in case of a default by the borrower, the two lenders will share the rights in the property according to the proportion of loans disbursed. In its Master Circular on Housing Finance – July 2012, the RBI states the following:

“In the case of individuals who might have raised funds for construction/ acquisition of accommodation from other sources and need supplementary finance, banks may extend such finance after obtaining pari passu or second mortgage charge over the property mortgaged in favour of other lenders and/or against such other security, as they may deem appropriate.”

So if you choose to go for a second mortgage loan with another bank, do remember to inform your existing lender about it as technically its his property until full repayment.

Tax benefits on Second mortgage loans

Other than top – up loans taken exclusively for home improvement, you cannot claim tax rebate on any other top- up loans. For home improvement loans, you can claim tax benefits under section 80C on interest payments made by you.