Mr. A has recently purchased a new property with the help of a home loan. In exchange of this, the bank has mortgaged his property till the time he will not complete the Loan EMIs. Now, after a gap of 4 years, Mr. A has again applied for a loan for home repair and renovation from another bank. So will he be able to get a loan this time? Yes. A second mortgage loan is the best option for him.
Many of us may not have heard about this term. But, it does exist in the banking world. Let’s understand the concept and basics of the Second Mortgage Loans through this blog.
Second Mortgage Loans-Meaning
As the name suggests, such type of loans can be availed keeping your property on mortgage for the second time with another bank. It simply means that when you mortgage your property for the second time you secure a new loan. Such type of loan is mostly taken for home improvement, repairs, and renovations. However, the interest rate of second mortgage loan is much higher as compared to the first loan and hence they are quite expensive.
Second Mortgage Loans-Concept
In case of a second mortgage loan, you keep the property as security for the second time to another bank. But it does not mean that the first bank will lose priority over it. However, in case of non-payment of EMIs, the first bank will get his dues first, then only then the second lender will be able to get his pending amount.
But then, here is another option, in which even the second bank will be able to get the same priority just like the first one. This is called a pari passu mortgage. Under this, in case of a default by the borrower, both the two lenders will share the equal rights on the mortgaged property. As explained under the Reserve Bank of India:
“In 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 a bank gives the loan on pari passu mode, then they can enjoy equal rights on the mortgaged property.
Second Mortgage Loans-Eligibility
The banks will access your disposable income and check whether you will be able to pay off the two loans consequently or not.
Secondly, they will access the value of the property. In case, the property rate has gone up, they easily provide a second mortgage loan.
Second Mortgage Loans-Drawbacks
Firstly, taking a second mortgage loan means you are putting your property at risk for the second time.
Secondly, a mortgage loan comes with a higher rate of interest. Also, you have to pay the processing charges as well as other charges on the new second loan again. Hence, these loans are much expensive than the first home loan.
So, keep all the above considerations in mind before opting for a second mortgage loan.