Mortgage Rankings

Mortgage Rank

In Ontario and generally there are multiple ranks of mortgages. Mortgage rankings refer to the amount and order of mortgages on the exact same real estate.

In the case of a first mortgage, basically that the mortgage was recorded first, before any other mortgage loans on the property. A mortgage registered anytime after the first mortgage is referred to as a second mortgage, and a mortgage registered after the second mortgage would be regarded as being the third mortgage, and so on. If the borrower who has a first and second mortgage can pay off that first mortgage, the second mortgage would now come to be the first mortgage and the third would be second.

The rank of the mortgage has actually nothing to do with the total amount of the mortgage, and in most cases, lenders will not approve a second mortgage that is greater than the first mortgage. Often if a larger second mortgage is required, the lender will pay out the first mortgage and incorporate that amount into the new loan.

Generally the rate of interest on a mortgage will increase with the amount of liability associated to that mortgage ranking. A second mortgage is generally considered to be more risky than a first, a third mortgage higher risk than a second. The thinking associated with this is that if the debtor defaulted on the original mortgage, the primary mortgage lender would begin the Power of Sale procedure to get back the money owing on its mortgage. Once the property is sold, the balance of the revenues of the sale would go to the additional mortgage loan holders, such as a second mortgage provider. Generally properties sold under power of sale do not maximize their full retail potential, and basically sell for less than market value. This is a possibility for the second mortgage lender and there may not be a sufficient amount of money left from the selling of the real estate to completely pay off the subsequent mortgages. To counterbalance this exposure the second mortgage lender will generally demand a much higher rate of interest.

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