Second Mortgage vs Refinance: Which One Should You Choose?

If you're sitting on a decent chunk of home equity, you're probably wondering how to make the most of it.

Whether you're planning renovations, consolidating debt or investing in something big, unlocking your property’s value can be a smart move. But should you go with a second mortgage or refinance your existing home loan?

Both options can provide extra funds, but they work in different ways and are suited to different financial goals. Read on to find out how each option works, their pros and cons, and which one might be the right fit for your situation.

What Is a Second Mortgage?

A second mortgage is an additional home loan taken out against a property that already has a mortgage. It allows you to tap into the equity you’ve built up without altering your original loan.

Many homeowners choose a second mortgage to fund major expenses like:

• Home renovations

• Purchasing an investment property

• Paying for education

• Consolidating higher-interest debts

Unlike refinancing, a second mortgage doesn’t replace your current loan. It simply adds a new loan on top of it. This means you’ll be managing two separate repayments.

Because it’s considered riskier for lenders, mortgage investments often come with higher interest rates and tighter lending criteria. Still, they can be a handy way to access funds while keeping your original mortgage untouched, especially if you’re on a favourable fixed rate.

What Does It Mean to Refinance?

Refinancing involves replacing your current home loan with a new one, either with your existing lender or a new one. It’s a common strategy when:

• Interest rates have dropped

• You want better loan features

• You’re switching from fixed to variable rates (or vice versa)

• You want to access your equity

When you refinance to access equity, your new loan is larger than what you currently owe. The difference is paid to you as a lump sum and can be used for anything from upgrades to investments.

Some key benefits of refinancing include:

• Lower interest rates and potentially reduced repayments

• Access to better loan features like offset accounts or redraw facilities

• The ability to consolidate multiple debts into one streamlined repayment

It’s worth noting that refinancing may involve break fees (if you're exiting a fixed-rate loan), new application or setup costs and possibly lender’s mortgage insurance if your new loan pushes your LVR (loan-to-value ratio) above 80%.

Second Mortgage vs Refinance: What’s the Difference?

Both second mortgages and refinancing help you tap into your home’s equity, but they do it in very different ways. Here’s how they compare:

Feature	Second Mortgage	Refinance
Structure	Adds a second loan on top of your existing one	Replaces your existing loan with a new one
Loan management	Two separate repayments	One single repayment
When it's ideal	If your current loan has favourable terms and you need extra funds	If you're looking for better rates, features or want to consolidate debts
Interest rates	Usually higher	Often lower, especially if switching to a better deal
Costs involved	Valuation, legal and application fees	Break costs, application fees, potential LMI

Second mortgages can be ideal for short-term needs or one-off expenses, while refinancing is usually more suitable for long-term financial improvements and simplifying your loan structure.

Which Option Is Right for You?

Choosing between a second mortgage and refinancing depends on your personal circumstances, goals and the structure of your current loan.

You might prefer a second mortgage if:

• You’re happy with your current mortgage

• You want to avoid break costs on a fixed-rate loan

• You need funds for a specific, one-off purpose

On the other hand, refinancing could be the better choice if:

• Your current home loan no longer offers a competitive rate

• You want to consolidate debts into a single repayment

• You’re looking for better features like offset accounts or flexible repayment options

Before making a decision, take time to review your loan, crunch the numbers on any fees or penalties and think about how your choice fits into your long-term financial plans.

Ready to Unlock Your Home Equity?

Whether you're thinking about refinancing, exploring a second mortgage or just want to understand your options, Richmond Residential is here to help.

We’ll give you honest advice, compare lenders and guide you through every step of the process.

Get in touch now and let’s make your home equity work harder for you.