Second Mortgages For Business Purposes

If you have heard of second mortgages, you might have some strong opinions. Second mortgages have a terrible reputation in the world of personal finance (thanks to the GFC!). Like any financial tool, second mortgages come with their own set of costs and benefits, however taking out a second mortgage for business purposes does have it's advantages. In this article, we'll take you on a journey through second mortgages for business, exploring how they work, when they make sense, and when they don't.

How does a Second Mortgage for Business Work?

A second mortgage is a pure asset lend that can be a great short-term solution for those in need of quick cash. By leveraging the equity in your home or other valuable asset, you can access funds without having to sell or give up ownership of your property.

This type of second mortgage allows you to borrow against the value of your asset, providing you with immediate access to a lump sum of money that can be used for a variety of purposes. Whether you need to cover unexpected expenses, purchase new equipment, make business improvements, or consolidate debt, a pure asset lend second mortgage can help you meet your financial needs quickly and efficiently. Furthermore, because the loan is secured by your asset, it typically comes with reasonable interest rates and less strain on your cashflow than some other types of loans. This can make it a cost-effective and convenient option for those looking for short-term financial assistance.

As the name suggests, a second mortgage is secondary. It sits behind your first mortgage. If you don’t repay your debts and your property is foreclosed, your first mortgage will be repaid before the second. You will recoup a smaller share of the pie if your property is sold off.

It is important to distinguish between a second mortgage which is essentially an extra ‘home loan’, and a second mortgage for business purposes as they are treated differently in the eyes of the law.

One of the biggest perks of a diversified property portfolio is the additional equity you build in your business.

When second mortgages make sense

There are several benefits to using a second mortgage for business purposes. Firstly, by leveraging your asset equity, you can access a larger amount of capital than you might be able to obtain through traditional business loans, providing you with the cash flow you need to spearhead new investments and business opportunities. From revamping tired commercial spaces to acquiring investment properties to starting your dream business, the potential uses are limitless.

(1) Property improvements: Whether you’re looking to revamp a commercial retail space or give your business premises a new lease on life with a slick renovation, second mortgages can provide the necessary funds. Not only do these improvements add to the value of your property, lowering your LVR and driving capital appreciation, but they can also enhance the quality of life for tenants and staff using the property. Many property investors will use a second mortgage to flip a property before sale. A second mortgage that funds a $50,000 property improvement might add $75,000 to the sale price, delivering a clear-cut ROI.  

(2) Debt consolidation: While debt itself isn’t bad, unmanageable debt can quickly snowball and derail your financial goals. This is where debt consolidation comes in. By using the equity in your property to pay off higher interest debts, you can reduce the big by-lines that keep your finances in the red. A simplified financial life, with a single, lower monthly repayment, primes you for long-term success.

(3) Investment opportunities: Savvy investors can use a second mortgage to accelerate their property plans. Refinancing an investment or commercial property loan allows you to access the usable equity on a property, which can then be used as a deposit to buy additional property. Second mortgages could also be used to renovate or ‘flip’ an investment property before selling. Even a small investment could ensure you realise a stronger capital appreciation. Given the lower seniority of second mortgages, this strategy carries more risk with it and should be pursued by seasoned investors.

(4) Business growth: By tapping into the equity in your property, a second mortgage allows you to secure the capital needed to fund your business’ launch, expansion, or crucial reinvestment. The applications are varied enough to suit any business. Whether financing equipment purchases, hiring talent, or expanding your marketing efforts, the lump sum or flexible credit line offered by a second mortgage can provide the financial boost your business needs.

What to be careful of

While second mortgages offer many benefits, they also have some potential downsides, among them is the risk of losing your secured property. You put your property on the line when you take out a second loan you cannot exit. If you fail to make the required payments and your serviceability crumbles, you risk losing the property through foreclosure. This is why you should have robust serviceability before you apply. Stable cash flow and good income, from investments or your business operations, put you in good stead to pay on time.b Loans, we firmly believe borrowers should have an exit in mind before they’ve even considered entering a loan facility.

Furthermore, you accumulate more debt with a second mortgage, especially if you use the funds for non-essential purposes. Be cautious about over-leveraging your property equity, as it can exacerbate financial stress in the long run.

To help mitigate this risk, we always recommend a detailed exit strategy. How do you plan to repay the loan? What happens if you can’t meet your regular repayment or your circumstances change? A common exit strategy is selling the property or refinancing. However, these should not be last-ditch strategies. Know your exit early.

Tips for using second mortgages wisely

(1) Plan ahead: Before taking out a second mortgage, have a well-defined plan on how to use the funds and how to repay the loan. It pays to be realistic. Take stock of all the income you’ll generate in the period and how you’ll adjust if things don’t go according to plan.

(2) Consider professional opinions: Taking out a loan is one of the most significant financial commitments that a business can make. If your situation is complex or you want more certainty, consult a professional in finance to help you understand the implications of a second mortgage.

Conclusion

Ultimately, using your asset equity to your advantage with a second mortgage can be a powerful tool for growing your business. By accessing the capital tied up in your home or other assets, you can take your business to the next level and achieve your goals more quickly and efficiently. Just be sure to carefully weigh the pros and cons first to ensure that it’s the right decision for your unique situation.

Talk to us at NoBnk before considering any loan facility for business purposes, we'll never steer you wrong.

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