Why does mortgage ranking matter in real estate-backed lending?
When you lend money and the loan is secured by property, the mortgage ranking decides who gets repaid first if the borrower runs into trouble and the property has to be sold.
On the Estateguru platform, most projects are backed by a first-ranking mortgage, offering investors an added layer of security.
What is a first-ranking mortgage?
If something goes wrong and the property needs to be sold, the holder of the first-ranking mortgage is the first to be repaid.
Example:
Peter borrows €250,000 from a bank to buy a flat. The bank is granted a first-ranking mortgage. If Peter can’t meet his obligations and the flat is sold for €300,000, the bank gets its €250,000 back first. The remaining €50,000 goes to Peter.
In Estateguru’s case, this means our claims, when backed by a first-ranking mortgage, have priority too.
What is a second-ranking mortgage?
A second-ranking mortgage means that if the property is sold, the first-ranking mortgage holder is repaid first, and the second-ranking mortgage holder only gets paid if there’s anything left.
Let’s use the same example:
Peter borrows €250,000 from a bank to buy a flat, again, with a first-ranking mortgage. He then borrows €75,000 from a friend to fund interior renovations, granting the friend a second-ranking mortgage.
If the property is sold for €300,000, the bank gets €250,000, and the remaining €50,000 goes to the friend. If it’s sold for €400,000, the bank gets €250,000, the friend gets €75,000, and Peter keeps the final €75,000.
Second-ranking mortgages carry more risk. Repayment depends on the selling price of the property. That’s why loans secured by second-ranking mortgages on Estateguru come with higher interest rates – it’s a risk premium.
How is a mortgage officially registered?
In Estonia, Latvia, and Lithuania, mortgages are set up via a notarised agreement and entered into the Land Register. Every mortgage has a ranking number, which determines repayment priority.
The process for setting up a first- or second-ranking mortgage is technically similar, the difference lies in the ranking, which directly impacts how well investor interests are protected.
Important: The ranking of mortgages can only be changed in the Land Register with the consent of all existing mortgage holders. So, turning a second-ranking mortgage into a first-ranking one requires written agreement from everyone involved.
When can a second-ranking mortgage still make sense?
There are situations where second-ranking mortgages can still be attractive for lenders (i.e., Estateguru investors):
- If the property’s value is significantly higher than the first loan. For instance, if the property is valued at €200,000 and the first mortgage covers only €80,000, there’s a good chance the second-ranking mortgage will be repaid too, depending on its size.
- If the loan term is short, the property is conservatively valued, located in a liquid market, and the borrower has been thoroughly vetted.
- And of course, consider whether the offered interest rate truly makes up for the added risk.
At Estateguru, loans backed by second-ranking mortgages are rare and always clearly marked.
Key Takeaways for Investors
- First-ranking mortgages offer greater security.
- Second-ranking mortgages come with more risk, but also the potential for higher returns. They can be a good earning opportunity.
- Always check the mortgage ranking behind a loan.
- Mortgages are always registered officially and notarised, and changes to their ranking require the agreement of all parties.
To see how we display the mortgage ranking, click on any loan number in the open loans section here.