Restrictions and requirements on "second mortgage" and "additional mortgage"

The difference between "Second Mortgage" and "Additional Mortgage"

Features	Add	Second Press
Lending Institutions	Usually the same bank	Another financial institution (usually not a bank)
interest rate	Generally lower, linked to the bank's prime rate (P)	Generally higher
Approval	More stringent, requiring stress testing and credit assessment	More relaxed, with possibly lower credit rating requirements
risk	Lower	High, due to higher interest rates and greater repayment pressure, and most of them are floating interest rates
Difficulty of application	Higher	Lower
Restrictions on Use	Some banks require explanation of the purpose of the additional mortgage funds	Usually no usage restrictions

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Second mortgage

definition: Refers to a second mortgage loan that the owner applies for from another lending institution using the same property as collateral, while the original first mortgage (provided by a bank or major financial institution) has not yet been repaid.

Restrictions and Requirements:

First mortgage lender agrees:

• Most banks or financial institutions will include "restrictive clauses" in the first mortgage contract, prohibiting the owner from applying for a second mortgage without written consent. If you apply without authorization, it may constitute a breach of contract and result in being required to repay the loan in advance.

Total LTV limit:

• The Hong Kong Monetary Authority stipulates that the total loan amount of a property mortgage (first mortgage + second mortgage) cannot exceed a certain proportion of the property value. For example:
  • Owner-occupied residential property: generally up to a maximum of 60%-90% (depending on property price and first-time homebuyer status).
  • Non-owner-occupied or investment property: The percentage is lower (such as 50%).

Higher interest rates:

• The interest rate for a second mortgage is usually higher than that for a first mortgage (may be as high as 6%-12%), and most of them are floating interest rates, which increases the repayment pressure.

Repayment ability review:

• Lending institutions will strictly review applicants' income, debt-to-equity ratio (DSR) and credit history.
• Hong Kong needs to pass a "stress test" (assuming that after the interest rate rises by 3%, the contribution does not exceed the monthly income of 60%).

Legal documents and formalities:

• It is necessary to sign a second mortgage contract and register a "Second Mortgage Legal Charge" with the Land Registry.
• Some mortgage institutions may require you to purchase life insurance or a guarantor.

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Refinancing (increasing the amount of mortgage loan)

definition: Refers to applying for an increase in the loan amount from the same lending institution when the original mortgage has not been repaid, usually based on the appreciation of the property or the owner's good repayment record.

Restrictions and Requirements:

Property valuation and remaining loan:

• The top-up amount depends on the difference between the latest property valuation and the outstanding loan. For example:
  • The current value of the property is 10 million, and the outstanding loan is 3 million. If the bank approves a mortgage ratio of 60%, the additional mortgage amount can be (10 million × 60%) - 3 million = 3 million.

LTV limit:

• Similar to second mortgages, they are subject to LTV restrictions set by the Monetary Authority of Singapore or the Central Bank. You can usually borrow a higher amount for owner-occupied properties.

Repayment ability review:

• Need to resubmit income proof and pass stress test (Hong Kong).
• If the additional mortgage is used for non-self-occupation purposes (such as investment), the approval conditions will be more stringent.

Restrictions on Use:

• Some banks require an explanation of the purpose of the additional funds (such as renovation, education, investment, etc.) and that they cannot be used for property speculation.

Interest rates and fees:

• Refinancing may require attorney fees, appraisal fees, and re-signing of mortgage documents.
• The interest rate may be higher than the original mortgage, depending on market conditions.

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Risk considerations

1. Interest rate fluctuation risk: If the second mortgage and additional mortgage have floating interest rates, the interest rate hike will greatly increase the repayment pressure.
2. Risk of falling property prices：If the market value of the property is lower than the total amount of outstanding loans, it may trigger a "negative equity" crisis.
3. Credit rating impact: Excessive borrowing may affect personal credit scores and affect future loan applications.
4. Legal consequences: If you fail to repay the loan on time, the lender has the right to repossess the property and auction it off.

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Practical advice

1. Consult professional advice: You should communicate in detail with your bank, financial advisor or lawyer before applying.
2. Compare different options: Second, the terms and conditions of different institutions (such as finance companies) vary greatly, so you need to carefully compare the interest rates and hidden fees.
3. Reserve buffer funds: Ensure that there are sufficient reserves to deal with emergencies (such as unemployment, rising interest rates).

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Frequently Asked Questions