Mortgage Ranking in Quebec: First and Second Rank

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Mortgage Ranking: Understanding Creditor Priority

When a property is encumbered by multiple mortgages, the question of which creditor will be paid first in the event of default becomes crucial. Mortgage ranking answers this question. In Quebec, rank is determined by the chronological order of publication in the Land Registry, in accordance with article 2945 of the Civil Code of Quebec (CCQ). This 'first published, first in rank' principle is the cornerstone of Quebec's immovable security system.

First Rank: The Creditor's Position of Strength

The first-ranking hypothecary creditor enjoys the best position. In the event of a forced sale of the property, they will be the first to be repaid from the sale proceeds, before all other hypothecary creditors and well before ordinary creditors. This privileged position explains why major financial institutions — chartered banks, Desjardins caisses populaires — systematically require first rank. OSFI requires federally regulated lenders to hold a first-rank mortgage for conventional loans, and CMHC only insures first-rank mortgages.

Second Rank: Higher Risk, Higher Rate

A second-rank mortgage is a security published after the first-rank mortgage on the same property. The second-ranking creditor will only be repaid after the first-ranking creditor has been fully satisfied. This increased risk translates into higher interest rates, often 2% to 5% above first rank. Private lenders, alternative financing companies, and certain credit unions are the main sources of second-rank financing in Quebec.

Common Situations Involving Second Rank

Supplementary financing for major renovations without refinancing an existing first-rank mortgage at a favourable rate.
Consumer debt consolidation using the residual equity in the property when the first rank cannot be disturbed.
Down payment for a revenue property or secondary property, financed through equity in the primary residence.
Bridge financing while awaiting the sale of another property.

Impact of Rank on Refinancing

Mortgage ranking has direct consequences on refinancing options. When a borrower wishes to refinance with a new lender, they generally must discharge the existing first-rank mortgage and publish a new mortgage in favour of the new lender. This operation entails additional notary fees. If refinancing is done with the same lender, the existing mortgage can often be modified (by amendment) without a change in rank, which is more economical.

Rank Assignment and Priority Agreements

The CCQ provides for the possibility of modifying the ranking order between hypothecary creditors through a rank assignment or priority agreement. These arrangements require the written consent of the creditors involved and must be published in the Land Registry to be enforceable against third parties. For example, a second-ranking creditor could agree with a first-ranking creditor to exchange their positions, or a new lender could obtain from an existing second-ranking creditor consent to be relegated to third rank.

Rank Assignment: An agreement by which a hypothecary creditor assigns their rank to another hypothecary creditor on the same property. The assignment must be published in the Land Registry to be enforceable against third parties. This mechanism is used in complex refinancing situations involving multiple lenders.

Practical Considerations for Quebec Borrowers

Before taking out a second mortgage, carefully evaluate the total financing cost considering the higher interest rate. Compare this option with a full refinance of your first-rank mortgage, especially if current rates are favourable. Your AMF-certified mortgage broker can analyze both scenarios and déterminé which is most advantageous for your situation. It is also important to verify that the total mortgages (first and second rank) do not exceed 80% of the property value, in accordance with OSFI guidelines for conventional financing. Some private lenders accept higher ratios, but at significantly higher rates.

Frequently Asked Questions

What is mortgage ranking?

Mortgage ranking is the order of priority of a creditor relative to other hypothecary creditors on the same property. It is determined by the date and time of publication of the mortgage in the Quebec Land Registry (art. 2945 CCQ). The first-ranking creditor is paid first in the event of a forced sale.

Why is first rank so important for lenders?

First rank guarantees the lender will be paid first if the property is sold under judicial authority. OSFI requires federally regulated lenders to hold a first-rank mortgage for conventional loans, and CMHC only insures first-rank mortgages. It is the most secure position for a creditor.

Can I have a second-rank mortgage?

Yes, it is possible to have a second-rank mortgage, often used to obtain additional financing without disturbing the first-rank mortgage. However, interest rates are generally higher and conditions stricter because the second-ranking creditor faces greater risk. Private lenders and alternative financing companies are often the sources of this type of financing.

How does mortgage ranking affect refinancing?

When refinancing with a new lender, the existing first-rank mortgage generally must be discharged and a new mortgage published in favour of the new lender. This entails discharge and new publication fees. If refinancing is done with the same lender, the existing mortgage can often be modified without a change in rank.

Can the rank between two hypothecary creditors be modified?

Yes, through a rank assignment or priority agreement. These arrangements require the consent of both creditors involved and must be published in the Land Registry to be enforceable against third parties. This mechanism is sometimes used in complex refinancing situations involving multiple lenders.

Does CMHC insure second-rank mortgages?

No. The Canada Mortgage and Housing Corporation (CMHC) only insures first-rank mortgages. Similarly, other mortgage insurers (Sagen, Canada Guaranty) only insure first rank. This restriction means second-rank mortgages cannot benefit from mortgage loan insurance, which limits high-ratio financing options.