First and Second Mortgages Explained
When a property secures more than one loan, the order in which those loans were registered determines who is paid first if the property is sold or the borrower defaults. That order is called priority, and it is the main difference between a first mortgage and a second mortgage.
What a first mortgage is
A first mortgage is the loan registered in first position against the property. If the property is sold, the first mortgage lender is repaid before anyone behind it. Because the position is well protected, first mortgages usually carry the lowest cost of borrowing available for that property.
What a second mortgage is
A second mortgage sits behind the first. It is repaid only after the first mortgage is cleared, so the lender takes more risk and prices the loan accordingly. Second mortgages are commonly used to access equity without disturbing a favourable first mortgage, or to fund a purchase, a renovation or a business need when refinancing the first mortgage is not practical.
Combined loan-to-value
A lender assessing a second mortgage looks at the combined balance of both loans against the property value. The lower that combined figure, the more room there is for the second lender if values fall or the sale takes longer than expected. Expect the lender to want a current valuation and confirmation of the first mortgage balance and terms.
Questions to ask
Does the first mortgage lender need to consent? What happens at the first mortgage renewal? What are the fees, the term and the exit for the second mortgage? Is there a plan to consolidate both loans later? Understanding the full picture, not just the new loan, keeps the structure manageable.
This article provides general information and is not personal financial, tax, legal, or insurance advice. Obtain advice relevant to your circumstances before entering a financing arrangement.
