So what is the difference between a first ranking and second ranking mortgage?
The mortgage ranking relates to where the lender ranks in terms of its rights if the borrower defaults on mortgage loan payments.
What’s a first ranking mortgage?
A first ranking mortgage, also known as a first mortgage or primary mortgage, is a type of home loan that is secured against the property being purchased. The lender holds a first ranking position on the property, which means that in the event of a default or foreclosure, the first ranking mortgage lender will be paid first before any other lenders. This type of mortgage is usually used to purchase a property and is typically the largest loan on the property. A lender of a first ranking mortgage is the lender that has the first right to proceeds from the forced sale of the property.
What’s a second ranking mortgage?
A second ranking mortgage, also known as a second mortgage or secondary mortgage, is a type of loan that is also secured against the property being purchased. However, the lender holds a second ranking position on the property, meaning that in the event of a default or foreclosure, the second ranking mortgage lender will only be paid after the first ranking mortgage lender has been paid in full. This type of loan is usually used to refinance an existing mortgage or to access equity in the property. The lender of a second ranking mortgage has rights to any sale proceeds only after the first-ranking lender has been paid what it is owed.
What are some of the other differences?
One of the main differences between a first and second ranking mortgage is the interest rate. First ranking mortgages typically have a lower interest rate than second ranking mortgages because they are considered to be a safer loan for the lender. Additionally, first ranking mortgages also tend to have better terms and conditions, such as longer loan terms and the ability to make additional repayments without penalty.
Another difference between the two is the amount of the loan. First ranking mortgages are typically used to purchase a property and are therefore larger loans. Second ranking mortgages, on the other hand, are usually used to refinance an existing mortgage or to access equity in the property and are therefore smaller loans.
It is important to note that in Australia, most banks and lenders will only lend up to 80% of the property value for a first ranking mortgage, which means that a borrower will need to come up with a deposit of at least 20% of the property value. However, some lenders may offer second ranking mortgages for up to 100% of the property value.
In summary, a first ranking mortgage is a type of loan that is secured against a property and holds first priority in the event of default or foreclosure. It typically has a lower interest rate and better terms and conditions.
A second ranking mortgage is also secured against a property, holds second priority in the event of default or foreclosure, typically has a higher interest rate and is used to refinance an existing mortgage or access equity in the property.