Sometimes it is what we think we know that gets us into deep water.
Priority Amounts and Priority Sums seem to fall in that category.
We have a vague knowledge of the terms but aren’t exactly sure of their meaning. I must admit, it is only when sitting in front a lawyer signing mortgage documents that these mortgage terms suddenly become relevant and it can give the borrower quite a fright when the lawyer suddenly points out the Priority Amount .
So, what exactly is a Priority Amount? A Priority Amount is an amount up to which the funder’s lending will rank before any subsequent lender’s funds, and is put in place firstly to protect the lender.
This amount becomes important when a property is placed for mortgagee sale by the lender.
The Power of Sale gives the lender the right to the proceeds of the sale and these proceeds are divided between the appropriate lenders (and borrowers if there is any left over). An example of this ranking is usually when a bank holds a first priority over a security (they get paid first), then subsequent registered charges get paid out. These can be second mortgages caveats etc.
The thing to remember is that the Priority Amount is not the amount owed by a borrower, and this is often where the confusion comes in. If the borrower has borrowed $400,000.00, the priority amount could be anything from 150% to 300% of the loan amount.
Some lenders have unlimited priority amounts. Taking the above example of $400,000.00 and a 300% Priority Amount, then the mortgage documents would reveal the following:
If that isn’t enough to send a borrower’s blood pressure through the ceiling, I am not sure what is. Take a deep breath and remember, the borrowers don’t owe this amount. A lender can only claim from the borrower what is actually owed to them.
However, what is owed to the lender will include such things as, the actual mortgage amount, any accrued penalty interest, and all costs associated with recovering the debt. It has been known for the costs to escalate to such an extent that even the higher Priority Amount does not cover the costs of recovery.
The second important reason for the Priority Amount to be greater than the initial loan amount being lent is of benefit to the borrower.
The higher Priority Amount leaves room for the lender to make further advances to the borrower over the same security and still have those advances ranked ahead of any other mortgagee that may come into the picture.
These advances can be made without having to alter mortgage documents every time and can be done without having to go through lawyers, thereby saving the borrower the cost of legal fees.
Another matter altogether is a Deed of Priority. This sets out the arrangement between two mortgagees who have a mortgage over the same security. The most common example is a First and Second Mortgage.
It regulates the order in which both mortgagees can claim amounts owed to them by the borrower. Once again, the first priority holder gets the first chance at recovery of debt, then the second priority holder, and so on down the line.
The Deed of Priority overrides the Priority Amount and usually limits the first mortgagee’s priority to the sum it has advanced plus 24 months interest and costs.
This then allows for a second mortgage etc to be put in place behind the first ranking mortgage. The higher risk being taken by the lower ranked charges is usually reflected in higher interest rates and their short-term nature.
Ros Kirkland is a Director, resi Mortgage Corporation
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