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// WORKED EXAMPLETHE ARITHMETIC A DECISION RESTS ON

First Mortgage: a Worked Example

The price falls on everyone behind you first.

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED · 6 MIN READ

// THE SHORT ANSWER

A first mortgage is the place at the front of the queue for one property's sale proceeds. A lender wants that place because its whole reading of the security depends on it: a loan at 60% of value has room for a 40% fall in price only if nobody else is paid before it. The rank comes from the land register rather than the loan agreement, and any later lender takes what remains after the first is repaid with interest and costs. When a price falls, the owner's equity goes first, the second mortgagee next, and the first mortgagee last.

BASIS  Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.

// MAKE THE CALL

Issue 03 — Kauri Dairy Holdings. The patriarch is retiring. The bank hears about the succession plan from the accountant first. Your call first, then the senior banker's.

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PART OF What Your Bank Holds as Security

// 01 — WHY A LENDER PAYS TO BE FIRST

A mortgage gives a lender the right to have a property sold and to be repaid from the price if the borrower defaults, while the owner keeps the property as long as the loan is paid. Several mortgages can sit over one property at once, and they are numbered by rank. New Zealand and Australian lenders speak of a registered first mortgage; in England and Wales the same position is usually a first legal charge; in the United States, a first lien.

Rank matters because a loan to value ratio assumes the value is there for the lender. A lender quoting 60% has its cushion only if no other claim stands in front of it, and any debt that does rank ahead has to be added to the loan before the ratio means anything. A first mortgage keeps that sum simple: there is no earlier mortgage to add.

// 02 — HOW THE RANK IS SET AND WHAT CAN CHANGE IT

Ranking between mortgages comes from the register. In England and Wales, registered charges on the same estate rank in the order the register shows. On the Torrens title registers of New Zealand and the Australian states, priority turns on lodgement or registration, whatever date the documents were signed: in New Zealand an instrument ranks by the time it is lodged, and in New South Wales by the order of registration. A lender therefore cares about the gap between advancing money and registering: a solicitor's undertaking covers it on some deals, and several Australian states offer a priority notice that holds a place on the title for a short period.

Lenders can change the order by agreement. A deed of priority settles it between them, and in New Zealand a registered mortgage priority instrument, the memorandum of priority in the land registry's guidance, changes the order on the title itself. The owner signs, and so at the least does the mortgagee giving up its place. When a first mortgage is discharged, the next mortgage moves up.

Being first among mortgages is not being first against everything. An interest already registered when the mortgage goes on, such as an easement, can bind the lender. Some statutory charges, land tax among them in several Australian states, can stand ahead of a registered mortgage. And first place does not automatically extend to every dollar a mortgage may later secure. In England and Wales a further advance keeps priority over a later charge only in the circumstances the Land Registration Act sets out, and other jurisdictions have their own rules, which is why a second lender facing an all-monies first mortgage usually asks for a cap on the amount that ranks ahead.

// 03 — THE EXAMPLE

A tile and bathroomware importer, constructed for this page like every figure in it, owns its warehouse and showroom, valued at US$5.0m. A bank holds a first mortgage securing US$3.0m, a 60% LVR. Two years on, a private lender advances US$1.0m against a second mortgage, taking total borrowing against the property to 80% of value. The business fails. By the time of sale the bank is owed US$3.20m with arrears, default interest and costs, and the second lender US$1.10m. Selling costs are US$0.15m. The outcome at four prices, in US$m:

Sale price 5.00 4.00 3.60 3.20
Selling costs −0.15 −0.15 −0.15 −0.15
Net proceeds 4.85 3.85 3.45 3.05
First mortgagee 3.20 3.20 3.20 3.05
Second mortgagee 1.10 0.65 0.25 0.00
Left for the owner 0.55 0.00 0.00 0.00

At US$3.6m, 28% below valuation, the bank is whole and the second lender receives 23 cents in the dollar. It holds a quarter of the original debt and takes all of the US$0.85m shortfall. The two break-even prices show why:

First whole while: price − 0.15 ≥ 3.20 → price ≥ 3.35 (33% below value)
Second whole while: price − 0.15 ≥ 3.20 + 1.10 → price ≥ 4.45 (11% below value)

At US$3.2m the loss reaches the bank, which is US$0.15m short, and the second lender receives nothing. Between the two break-even prices, every dollar of arrears and default interest on the first loan comes out of the second lender's recovery, because the first loan ranks ahead. The valuation, the LVRs and the prices belong to the example and are not offered as market norms.

// 04 — HOW IT DIFFERS FROM THE SECURITY BESIDE IT

A second mortgage is the same instrument one place back, and usually with fewer practical choices. The first mortgagee ordinarily decides when to sell, and a buyer will want the first mortgage cleared, so a second mortgagee who enforces must repay the first or sell subject to it. Second lien is the corporate-finance version of the same idea, where two classes of lender share a security package under an intercreditor agreement.

A first mortgage also differs from a general security agreement, which covers a company's personal property, such as receivables, stock and plant. In New Zealand and Australia a separate personal property register decides that queue, and the land register decides the mortgage, so a business that has given both has given two securities with two queues. In England and Wales a debenture commonly takes land and other assets in one document, with the land charge registered at HM Land Registry.

DEFINED IN ONE PARAGRAPH → · LVR, SECURITY AND COLLATERAL → · HOW TWO LENDERS RANK →

// 05 — WHERE IT DECIDES A FILE

Most of the work happens before the money moves. The lender's solicitor searches the title, lists what is already registered, and a first-ranking registered mortgage becomes a condition precedent to drawing. The mortgage usually forbids further mortgages without the lender's consent, because a second charge brings another party with rights over the same asset. A request to add one tells the first lender something about the business as well as the security: it needed more money than the first loan gave.

On a development loan, the first mortgage covers the land and whatever is built on it, and the lender gives it up title by title: a partial release on each settlement, against an agreed part of the sale price. That is how sales repay the loan. If a borrower defaults, the first mortgagee usually runs the sale under the duties of a mortgagee sale, and any surplus goes to those next entitled. Rank decides who is paid. It does not make the property sell for its valuation.

THE DEVELOPMENT LOAN → · WHAT THE LENDER MUST DO ON A SALE →

// SOURCES

The documents the statements on this page rest on. Each was opened and checked when cited.

  1. Land Registration Act 2002 (UK), section 48 — priority of registered charges — Registered charges on the same registered estate rank between themselves in the order shown in the register — section 02.
  2. Land Registration Act 2002 (UK), section 49 — tacking and further advances — A further advance ranks ahead of a later charge only where there is no notice, an obligation entered on the register, or an agreed maximum entered on the register, or where the later chargee agrees — section 02.
  3. Toitū Te Whenua Land Information New Zealand, About Memorandum of Priority — The instrument changes the priority of existing mortgages or encumbrances, and the guidance lists the owner, the mortgagee gaining priority and any mortgagee losing it as signatories — section 02.

// QUESTIONS PEOPLE ASK

What is the difference between a first and second mortgage?
The order of payment. On a sale, the first mortgagee is repaid in full, with interest and costs, before the second receives anything. Both are registered against the same property and both carry a right to enforce, but the second starts losing money as soon as the price fails to cover both debts. A second lender therefore charges more for the risk, and reads value only after adding the first loan to its own.
What happens to a second mortgage when the first is paid off?
It moves up. Once the first mortgage is discharged, the next registered mortgage becomes first-ranking, so a borrower who repays the first loan early has improved the remaining lender's position. A refinancing works differently. A new lender expects to rank first, so the second mortgagee has to agree to a change of priority or be repaid; otherwise the new mortgage ranks behind it on the register.
Can you take out a second mortgage without telling the first lender?
The register may accept the entry, but the contract usually forbids it. Most first mortgages prohibit further charges without consent, and a breach can be an event of default. In England and Wales a first lender commonly has a restriction noted on the register that blocks a later charge without its consent. Even where nothing prevents registration, a second lender needs to know what the first mortgage secures, and asking discloses the plan.
Does a first mortgage guarantee the lender gets its money back?
No. It decides the order, not the amount. If a sale does not cover the debt, the first mortgagee has a shortfall, and whether it can pursue the borrower for the balance depends on the loan and the borrower. Rank gives no protection against a valuation that was too high, a specialised building with few buyers, or a long and costly sale. It protects a lender against other lenders; the property's value protects it against the market.

// NEXT TO IT

// ON WHOSE DESK

The seats that read this term in an ordinary week. Each page says what the seat is for, who arrives in it, and the shape of the round it runs.

  • Credit sanctionerHolds delegated authority and signs — or declines — the lending the front line brings.
  • Legal counselAdvises the bank on what it can do, drafts and negotiates what it signs, and manages what goes wrong.
  • Lending operations officerTurns an approval into a working facility — documentation, security, drawdown, and the register that says what the bank actually holds.

THE IN-TRAY · ONE MINUTE

Make the call on one file.

A short file on the ground this page covers. Every option opens with how far it sits from a senior banker’s read.

THE CALL · THE LOAN · PROTECTION

A borrower fails. The bank holds a floating charge over its stock and debtors. Employees are owed wages, and the tax authority is owed sales tax.

Who may be paid before the bank from those assets?

1 FILES · PICK A CALL ON ANY OF THEM

7 MORE ON THE LOAN · PROTECTION →WHERE DO YOU READ FROM? THE PLACEMENT →

THE READING ROOMIN ONE PARAGRAPHFirst mortgage What is a first mortgage, and why does a lender insist on ranking first?