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101 Streetsmart Condo Buying Tips for Canadians (2006). Douglas Gray, B.A., LL.B.. p. 40 Bottom. The author replicated the quote benaeth in his other book (unrighteously?).

Secondary Financing

Secondary financing generally consists of a second mortgage and possibly a third. You may wish to take out a second mortgage because the existing first mortgage (which you plan to assume) has an attractive interest rate or other desirable features, and because there will be a shortfall between the amount of your available down payment and the amount of the first mortgage. You therefore need to obtain funds. Chartered banks will usually provide money for second mortgages up to a limit of 80 per cent of the lower of the purchase price or appraised value.
   You can also obtain second mortgages through mortgage brokers or other sources that could go as high as 90 per cent, or sometimes higher, of the lower of the purchase price or appraised value. If the second mortgage has a term that is

p. 41

longer than that of the first mort- gage you assume, make sure you have a postponement clause put into the second mortgage. With this clause, you would be able to automatically renew or replace the first mortgage when it becomes due without having to obtain permission from the second mortgage lender to do so. In other words, if you renewed the first mortgage or obtained a replacement first mortgage, that mortgage would still be in first position, ahead of the second mortgage.

Abbreviate Mortgage 1 as M1.

I don't understand the emboldened sentences. 1. Is the author referring to different mortgagors, or referring to one mortgagor for both mortgages?

  1. Why would M2 hinder from you renewing or replacing M1?

  2. Why do you need "permission from" mortgagee #2 to renew or replace M1?

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When you take out a mortgage, someone lends you money secured on the property you are buying. To protect that loan, the lender takes out a lien on the property. This means that should you fail to make the repayments, they have "first dibs" on the proceeds of selling the property: they will take up to the amount of the loan before anyone else gets to see the money.

In the case of a single mortgage, it is quite simple: the property is sold (either because you choose to do so, or the lender has forced a sale) and the (single) lender gets the money they are owed and the rest (if any) comes to you.

With a second mortgage, it gets a little more complicated: the lenders start to form a queue. The original lender is at the head of the queue: if the property is sold, they get their cut first. If there is money left over, this goes to the second lender and only then does any remainder come to you.

If the first mortgage is for a shorter period than the second, then when the first mortgage expires you have two options: (a) repay the loan or (b) take out a new mortgage to repay the first lender. The assumption is you won't have the money to do (a) and will have to take out a new mortgage.

Without a postponement clause when the first mortgage expires, the second lender will "move up the queue" and get "first dibs" on the proceeds of a sale. The new lender will join the queue behind what was the second lender. Being second (or further back) in the "queue" is always more risky than being first, so depending on the values of the different loans, this may mean that you have difficulty (or pay high rates) to get a replacement loan.

With a postponement clause you can let the new lender back in at first place in the queue without having to ask the second lender's permission. This will make remortgaging the original loan amount easier.

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Some Canadian mortgages do not completely repay the principal during the term of the mortgage, you'd have to remortgage the remaining principal at the end of the period (when the mortgage becomes due).

The second mortgage likely says that if a bank forces a sale because the mortgage is not being paid, the properties assets are repaid in the order of the take out dates of the mortgage. The bank who gave you the first mortgage is fine with that, they get their money first and the second mortgage bank is also OK as they knew what they were getting into when they gave out that mortgage.

If you need a third mortgage because the first one is ending, by default trying to find another second mortgage rather than another first mortgage because the second mortgage will now be your first mortgage unless you insert some clause when you take out the second mortgage to say that renewal of your first mortgage still gets to put it first in the queue. You want it first in the queue as you'd be able to get better terms on that kind of mortgage.

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