Understanding Priority Amounts in Mortgages

When obtaining a home loan, your lender will specify a “priority amount” to be recorded in the mortgage documents. But what is a “priority amount”?

A priority amount is the maximum sum that a lender’s security interest will rank above any subsequent lenders. The priority amount is the maximum sum that a lender may claim from you if you default on your home loan. 

Often, a priority amount is 1.5x the value of the property for which the mortgage is being registered against, although this does vary. The fact the sum is greater than the value of the property is intended to protect the lender by covering not only the original loan amount, but potential subsequent loans, interest, fees and costs.

The priority amount does not reflect your loan balance, and it does not increase your liability to the bank, from what is actually owed. It merely provides the lender with the right to recover the full amount owed in the event of a default (and where the priority amount is more than the value of the property, it also means that the bank ensures its mortgage is first ranking, and the only one on that property). 

For example, if you are purchasing a property valued at $1,000,000 and your home loan is $700,000, then your lender might specify a priority amount of $1,500,000 plus interest to be recorded in the mortgage documents. The priority amount being 1.5x the value of the property, this covers the original loan amount, interest, fees and costs.  

Having a higher priority amount can be advantageous to you if you wish to borrow additional funds in the future. The initial priority amount may already provide the lender with sufficient security for additional borrowing, meaning you may avoid the need to engage a solicitor and incur legal costs to update the priority amount recorded in the mortgage documents. In some situations, where the property value is high but the lending is low, it can be advantageous to have the priority amount as low as the lender will allow so that a second mortgage can be registered against the property, if needed. 

If you have any questions or concerns about the priority amount included in your mortgage documents, you can contact us by email reception@dtilawyers.co.nz or by telephone on (07) 282 0174.