The right of first mortgage is a legal right granted by the mortgage lender (usually a bank or other financial institution) over a property used as collateral for a loan. This right gives the lender priority in recovering the loan amount in the event the borrower defaults (for example, through bankruptcy or default).
Features of the right of first mortgage:
- Priority in Payment : The mortgage lender with the right of first mortgage has priority over other creditors when the property is sold. If the property is sold, the first mortgagee’s loan is paid off first before other debts are paid.
- Real estate as collateral : The real estate (for example a house or commercial property) serves as collateral for the loan. If the borrower cannot repay the loan, the mortgage lender can sell the property to pay off the debt.
- Relationship to other mortgages : If there are multiple mortgages on the same property, the first mortgage has the highest claim on the proceeds of the sale of the property. Mortgages that are established after the first mortgage have lower priority, which means that the interest and repayment on these secondary mortgages will not be due until the first mortgage has been fully paid off.
Why is it important in real estate financing?
The right of first mortgage offers the lender a certain degree of protection. Since the mortgage lender is first in line to be repaid from the sale of the property, this right is often considered a relatively safe way of lending, especially for real estate projects. Therefore, it is important for the lender to always obtain the right of first mortgage when granting a loan for real estate.