Mortgage ranking and priority explained

Why ranking matters

When more than one lender holds security over the same property, someone has to be first in the queue. Ranking is the order in which secured lenders are entitled to be repaid out of that property if it is sold. The lender at the front is often called the senior or first mortgagee; the one behind it is the junior or second mortgagee.

For a borrower, ranking can feel like a technical matter between lenders. It is not. The order shapes how much each lender will advance, what each one charges, what consents you need before refinancing, and who controls a sale if things go wrong. Understanding it before you add a second lender to a title avoids surprises later.

How registration sets the order

Most Australian land is held under the Torrens title system. Each state and territory keeps a register of land, and a mortgage becomes a registered interest once the land titles office records it against the title. Registered mortgages generally rank according to the order in which they were registered, not the order in which the loan papers were signed or the money was advanced.

That is why lodgement at settlement is carefully choreographed. Lawyers or settlement agents for each party lodge the transfer, any discharge of an old mortgage and the new mortgages in a set sequence so that each one lands where the parties intended. Some states also let a party lodge a notice before settlement that briefly holds the register while a transaction completes; your conveyancer can explain what applies where the property is located.

A caveat sits outside this neat order. It is a notice warning the world of a claimed interest rather than a registered mortgage, and the rules for how it ranks against other interests are more involved. The security types lesson explains caveats in more detail.

First and second mortgages compared

A second mortgagee looks at the whole stack of debt, because its recovery depends on there being value left after the senior lender. The LVR and loan-to-cost calculator lets you enter both loans against a value you supply to see the combined position. The second mortgage loans page covers the product itself.

Deeds of priority and priority amounts

A deed of priority is a contract between mortgagees, usually with the borrower as a party, that records the agreed order of their securities. It may simply confirm what registration already shows, or it may reverse it, for example where a later lender has agreed to sit ahead of an earlier one.

The central term in most deeds is the priority amount. This is the ceiling up to which the senior lender's claim ranks ahead of the junior lender. Deeds often add interest, fees and enforcement costs on top of a principal figure, though the drafting varies. Anything the senior lender is owed above that ceiling may then rank after the junior lender.

Deeds commonly deal with several other matters:

• Whether the senior lender can make further advances and keep its top position for them.
• Whether each lender must notify the other of a default.
• Whether one lender must give the other a chance to cure a default or buy out its debt before selling.
• How sale proceeds are shared and who controls the enforcement process.
• What happens when either loan is refinanced or extended.

The priority amount deserves particular attention when the senior loan uses capitalised interest. A balance that grows each month can approach the ceiling faster than expected, especially if the loan runs past its planned term. If the senior lender then needs a larger priority amount to agree an extension, the junior lender's consent becomes part of your negotiation.

Intercreditor deeds in development deals

On larger projects, the relationship between a senior construction lender and a mezzanine or preferred equity funder is often set out in an intercreditor deed. It covers the same ground as a deed of priority and usually goes further: standstill periods during which the junior funder cannot enforce, information sharing, step-in rights and the order in which each funder may act. The mezzanine finance page explains where that layer of funding sits.

What ranking means on enforcement

Ranking matters most when a loan goes into default and a lender moves to sell. In broad terms, the process looks like this:

1. The lender issues the notices required by the loan documents and the law of the relevant state.
2. If the default is not fixed, the mortgagee may take possession and sell the property.
3. The selling mortgagee applies the proceeds in the order the law and any deed of priority require: generally the costs of the sale first, then the secured debt of the selling lender, then later registered interests.
4. Any surplus after all secured lenders are paid generally goes to the owner.

When a second mortgagee wants to enforce, it faces a practical obstacle: a buyer will want clear title, so the first mortgage normally has to be paid out at settlement. That is why junior lenders bargain for notice and cure rights in the deed, and why some will pay out the senior lender themselves to take control of the sale.

If the proceeds fall short, the debt does not simply vanish. The borrower usually stays personally liable for any shortfall, and so do guarantors who signed a personal guarantee. The default and enforcement lesson walks through notices and borrower protections, which differ between regulated consumer loans and business-purpose loans.

A worked description in words

Picture a hypothetical owner of an investment property with an existing bank loan in first position. The owner wants short-term funds for a business need and approaches a private lender offering a second mortgage.

The private lender first checks whether the bank's mortgage allows further security. It does not without consent, so the owner asks the bank. The bank agrees and signs a deed of priority with a priority amount that covers its current balance plus an allowance for interest and costs. The private lender then assesses the combined debt against its valuer's figure for the property.

Later the business need takes longer to resolve and the private loan falls into arrears. If the property is sold, the bank is repaid first up to its priority amount, then the private lender from whatever remains. A modest fall in value can wipe out most of the junior lender's cover, which is exactly why second mortgages are priced higher and why both loans need a credible exit.

Common mistakes

• Assuming a new lender can register behind the existing one without any consent from the first lender.
• Ignoring the priority amount, then finding that an extension of the senior loan needs the junior lender's agreement.
• Treating the junior loan as low risk for the borrower because it is small, when a default on either loan can trigger a cross-default under the other.
• Forgetting that refinancing the first mortgage usually means negotiating a fresh deed of priority with the junior lender.

What to ask

1. Does my existing mortgage permit further security, and whose consent is needed?
2. Will there be a deed of priority, and what is the priority amount and what does it include?
3. Can the senior lender advance more money and keep its top position for that amount?
4. What notice and cure rights does each lender have before the other sells?
5. What happens to the deed if either loan is refinanced, extended or increased?
6. Am I or any guarantor personally liable if a sale leaves a shortfall?

Ask your lawyer to read any deed of priority or intercreditor deed with you before you sign, because these documents are negotiated between lenders and often run for many pages.

Related reading

• First mortgage private loans
• Valuations for lending
• Loan cost estimator