How to refinance a second mortgage: roll it into one first mortgage, move it to another lender or extend it, and what the payout really costs.
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Refinance Second Mortgage · Payout Figure · Exit
Most second mortgages are meant to be temporary, yet the hard part is rarely getting one. It is getting out cleanly. Here are the three ways to refinance a second mortgage, what each one needs from you, and what the payout really costs.
Quick Answer
You can usually refinance a second mortgage three ways: roll both loans into one new first mortgage, move the second mortgage to another lender, or extend it with your current lender, and the right one depends on your equity, income evidence and payout cost. Ask for a payout figure first, then compare each route against it. If you are still choosing a lender, start with second mortgage loans.
Also called: refinance a second mortgage, second mortgage refinance, refinancing out of a second mortgage. All three mean the same thing: paying out an existing second mortgage with new funds, or rewriting it on new terms.
Can you refinance a second mortgage?
You can refinance a second mortgage, and for most borrowers it is the plan from day one. A second mortgage is usually written short, priced above a first mortgage and taken for a specific job: clearing a tax bill, funding stock, or covering a gap while a sale or contract lands. Once that job is done, the question becomes how to get out.
There are three ways out. You can roll both loans into one new first mortgage, move the second mortgage to a different lender on better terms, or extend it with the lender you already have. Each route needs different things from you, and each carries its own cost.
This is a different question from choosing between a second mortgage and refinancing your first loan in the first place. If you have not taken the second mortgage yet, read our comparison of a second mortgage versus refinancing the first loan. This insight is for borrowers who already have one and want to leave it.
Where this commonly lands: a borrower who planned the exit when the loan was written refinances on time, at a known cost. A borrower who left it until the last month ends up negotiating from a weaker position.
What are the ways to refinance a second mortgage?
The ways to refinance a second mortgage are consolidation into one first mortgage, a move to another second mortgage lender, or an extension with the lender you have. The table sets out when each fits and what each lender typically needs to see.
| Route | When it fits | What the lender needs | What to watch |
|---|---|---|---|
| Consolidate into one first mortgage | Enough equity to carry both balances in one loan, and income that now supports the larger repayment | A valuation, a combined loan-to-value ratio inside the new lender's limit, income evidence and the purpose of the original funds | Discharge of both existing loans, new loan fees, and whether the new loan is assessed as regulated credit |
| Move the second mortgage to another lender | The first mortgage is fine, but the second is costly or ending and the first lender will not lend more | A clear exit plan, the first lender's position on the title and, where required, its consent | Paying establishment costs twice in a short period, and a new term that sets a fresh clock |
| Extend with the same lender | The original exit is delayed, not broken, and you need more time | Updated figures on the property, the business and progress on the exit | Extension fees, a revised rate, and terms that differ from the original contract |
Which route do most borrowers take?
Most borrowers aim for consolidation, because one first mortgage is usually the cheapest and simplest place to end up. Moving the second mortgage tends to suit borrowers whose income evidence is not yet ready for a first mortgage lender, often where private lending is the realistic option for a further period. In practice, an extension is usually the fallback when a sale or a tax return runs late, not the first choice.
What does it cost to refinance out of a second mortgage?
Refinancing out of a second mortgage costs whatever the payout figure says, plus the costs of the new loan, and the payout figure is the real number. The interest rate on the new loan matters, but it is only one line in the comparison. A lower rate can still leave you worse off once exit charges and new fees are added.
| Cost line | What it is | How it is usually set |
|---|---|---|
| Payout figure | The total your current lender says is needed to close the loan on a given date | Balance, accrued interest and any exit charges, quoted for a set date and valid for a short window |
| Minimum interest or early repayment | A charge for repaying before a set period has passed | Written into the loan contract; varies by lender and by loan |
| Discharge | The administration and registration cost of removing the mortgage from the title | A lender fee plus a government registration fee, which differs by state |
| Valuation | A new valuation ordered by the incoming lender | Depends on the property and the valuer; sometimes paid by the borrower |
| Legal | Solicitor costs on both sides of the refinance | Private lenders commonly pass their legal costs to the borrower |
| New loan fees | Establishment, broker or line fees on the incoming loan | Varies by lender and by product; ask for every fee in writing |
Minimum interest can outlast the loan, varies by lender. Some second mortgage contracts charge a set number of months of interest even if you repay early, so refinancing in the first months can cost more than staying. Read that clause before you set a refinance date.
For what moves the price of the incoming loan, see our breakdown of second mortgage rates in Australia.
What do lenders need to roll a second mortgage into one first mortgage?
To roll a second mortgage into one first mortgage, lenders need enough equity to cover both balances, income that services the combined loan, and a clear account of what the second mortgage was used for. Combined LVR decides consolidation, varies by lender: the new lender adds both balances together and measures them against the property's value, using its own loan-to-value ratio limits.
- Equity. The combined balance, plus costs, has to sit inside the new lender's limit for your property type and documentation level.
- Servicing. The lender runs serviceability on the whole new loan, not just the part that replaced the second mortgage.
- Self-employed income evidence. Tax returns, BAS, bank statements or an accountant's letter, depending on the product. Our guide to low doc income documents sets out what each type accepts.
- Purpose of the original funds. If the second mortgage was business purpose and the new loan is secured on your home, the lender may assess part or all of it under responsible lending rules. Our insight on second mortgage exit rules for business-purpose loans explains why that matters.
If you are also clearing other debts in the same refinance, which debts can roll in and how servicing is worked out is covered in our debt consolidation refinance guide.
What happens if the term ends before your refinance is ready?
If the term ends before your refinance is ready, the loan falls due and the lender can charge default interest and start recovery steps, unless you have agreed an extension. An extension is a new negotiation. The lender will usually want updated figures, may charge a fee, and can change the rate or other terms. It is not obliged to agree.
Plan the refinance before the term ends. A workable order looks like this:
- Diary the date. Note the repayment date and any minimum interest period when the loan settles.
- Start the refinance early. Begin well before the term ends, so a valuation or document delay does not push you past it.
- Ask for an extension in writing if you need one. Do it before the term ends, not after the loan is in default.
- Keep the lender informed. A lender who knows the exit is progressing is usually easier to deal with than one who hears nothing.
Default interest is set by your loan contract and is typically well above the standard rate, which is why missing the date is so costly. If repayments are already hard to meet, Moneysmart's guide to problems paying your mortgage sets out your options and where to get free help. If you think the lender has acted unfairly, you can take a complaint to the Australian Financial Complaints Authority, after first raising it with the lender. What a second mortgage repayment date means in practice is covered in our second mortgage guide.
When does refinancing a second mortgage fail or cost more than it saves?
Refinancing a second mortgage fails when the numbers that supported the original loan have moved against you, and it costs more than it saves when exit charges and new fees outweigh the cheaper rate. The four common causes are a lower valuation, a changed credit file, tax debt and a first lender that will not lend more.
Refinance usually works
- Valuation has held or risen
- Tax lodgements and BAS are up to date
- Repayments on both loans have been on time
- The exit was planned when the loan was written
Refinance usually stalls
- Valuation has fallen, so the combined loan no longer fits
- New defaults or late payments on the credit file
- Unpaid ATO debt or a payment plan that has lapsed
- The first lender refuses a larger loan
Changes on your credit file since the original loan can close the cheaper routes and leave only a move to another second mortgage lender. Tax debt is the other common block; borrowing to clear it is covered in our guide to ATO tax debt loans.
Sometimes the honest answer is that staying put until the minimum interest period ends, or until the next tax return is lodged, is cheaper than refinancing now. Your exit strategy can move without being abandoned. Whether a break, minimum interest or default interest clause in your contract is enforceable as written is a question for your solicitor.
A second mortgage has three ways out: consolidate into one first mortgage, move to another lender, or extend with the one you have. Consolidation needs equity, servicing and clean income evidence. A move needs a clear exit plan. An extension needs the lender's agreement and usually costs something. Whichever route you take, compare it against the payout figure, read the minimum interest clause, and start before the term ends.
Key takeaway: ask for a payout figure and diary the repayment date now, then plan the refinance before the term ends.Frequently Asked Questions
To refinance a second mortgage you pay it out with funds from a new loan, or rewrite it on new terms with the lender you have. The three usual routes are rolling both loans into one first mortgage, moving the second mortgage to another lender, or extending it. Start by asking for a payout figure, because that number, not the rate, decides whether a refinance makes sense.
What usually disqualifies you from refinancing a second mortgage is too little equity, income evidence that does not support the new repayments, or a credit file that has changed since the original loan. Unpaid tax debt, arrears on either loan and a first lender that refuses to lend more can also block a route. A disqualifier on one route does not always rule out the others, which is why it pays to look at all three. Lenders who work with impaired files are covered in our guide to second mortgages with bad credit.
The 2% rule for refinancing is a United States rule of thumb that says a refinance is worth it when the new rate is around two percentage points lower. No Australian lender applies it, and it ignores the costs that matter most on a second mortgage, such as minimum interest, discharge and new loan fees. Compare the total cost of staying against the total cost of leaving instead, as set out in our look at what sets second mortgage rates.
A second mortgage loan to refinance debt is a loan secured behind your first mortgage that pays out other debts, such as business loans, cards or a tax bill. It can tidy several repayments into one, but it is usually short term and priced above a first mortgage, so it needs a planned exit. Which debts can roll into a property refinance, and how servicing is worked out, is covered in our debt consolidation refinance guide.
You can often ask to extend your second mortgage instead of refinancing, but the lender does not have to agree and the terms can change. Expect a fresh look at your equity and income, and possibly new fees or a revised rate. Ask early, well before the term ends, and compare the extension against refinancing with another lender, as our guide to internal and external refinancing explains.
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