Unlock Your Property's Potential With Second Mortgage

Delhi-based techie, Anita Raj, purchased a property worth Rs 60 lakh in Noida. She took a home loan of Rs 36 lakh for 20 years from a public sector bank. After five years, Anita needed additional Rs 5 lakh for the routine maintenance of her house. She approached another bank for the second mortgage and got the required loan. This way Anita mortgaged the same property twice to borrow additional funds.

MakaaniQ tells you more about second mortgage.

What does second mortgage mean?

Second Mortgage means giving a loan against the security of a property which has already been mortgaged elsewhere. In other words, it means that the property/ asset is being used the second time to secure a fresh loan.

As the second mortgage involves a lot of risk, it draws a higher rate of interest.

Let us understand it using a representative case:

Suppose you own a property worth Rs 50 lakh and have taken a home loan Rs 10 lakh against the property. You wish to avail of another loan against the same asset, which is mortgaged elsewhere.

This can be achieved through three ways:

• In the example above, the lender has kept an adequate margin between the amount of home loan and the value of the property. In such cases, you can approach the existing lender to enhance the facility (for a top-up loan), provided your loan account is clean.

• Approach another lender to re-appraise the loan (through balance transfer) and get the required credit sanctioned. The fresh mortgage will be created for the full amount of loan in favour of the new lender. The no-objection certificate (NOC) will be obtained from the previous lender along with other title deeds, for no charge on the property.

• In case the new lender is unable to fund the full amount of loan, but is ready to settle for an additional amount needed, you can take the NOC from the first lender and create a second mortgage in favour of the new lender.

Settlement of the second mortgage loan

Second mortgage means that the first lender will get preference over the new lender for the mortgaged asset. This means that in the event of non-payment of dues, the first lender will realise his dues first, and only then the second lender will have a chance to clear his dues.

It is mostly treated as a pari passu charge, which means that both the lenders will exercise their rights on the property on the basis of the amount of the loan disbursed.

As per the Reserve Bank of India's (RBI) master circular RBI/2015-16/46, in case of supplementary finance, “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”.

Should you opt for second mortgage?

It is quite evident that the second mortgage is harder to obtain. The first lender always has the first lien on the property mortgaged, in case of the foreclosure or loan default. When the second mortgage is taken, the new lender is aware that if the mortgage is foreclosed on or the loan is defaulted, the first lender is paid what is owed to him first and then the remainder goes to the subsequent lender.

The second preference makes it rigid for the lenders to fund the second mortgage.

Also, under the second mortgage arrangement, there are two payments to two different lenders every month, which makes it tough for the borrower.