Subordination is the process of ranking home loans (mortgage, HELOC, or home equity loan) by order of importance. When you have a home equity line of credit, for example, you actually have two loans – your mortgage and HELOC.
Both are secured by the collateral in your home at the same time. This can create a complex situation when it comes to loan priority and repayment. Mortgage subordination provides a solution.
What is mortgage subordination?
Mortgage subordination changes the priority status of different loans secured against your home. It ensures that your original mortgage keeps the first lien position, while the HELOC or second mortgage gets a lower priority status. This allows you to take out a second loan against your home’s equity while protecting the interests of your original mortgage lender.
Learn everything you’ll need to know about mortgages in Singapore here!
Why is subordination necessary?
Most mortgages have a “due on sale” clause that gets triggered if you use your home as collateral for another loan. This clause gives the lender the right to demand full repayment of the mortgage immediately if you do this.
To avoid early repayment, you need to get the lender’s permission to take out a second loan. This is done through subordination.
Though, when it comes to home loans, while subordination is a common practice in Western markets, it’s not frequently seen in Singapore due to the difficulty in finding a bank willing to agree to subordinate its lien.
How does subordination work?
You start by requesting subordination from your original mortgage lender. This gives them priority over the new lender in case of default. If approved, you’ll sign a subordination agreement stating that the second lender cannot foreclose or otherwise jeopardise the first mortgage. This satisfies the original lender while allowing you to access your equity.
What are the benefits of subordination?
Subordination lets you take cash out of your home through a second loan while keeping the original mortgage intact. This avoids hefty prepayment penalties and refinancing costs. It also lets you consolidate high-interest debt at a lower rate through a second mortgage or HELOC. Overall, subordination provides flexibility in using your equity.
Key considerations for subordination
Check if your mortgage allows subordination without penalty. Also, ensure the second lender accepts a subordinate lien position. Shop around to get the best terms on the second loan. Finally, make sure you can handle the higher total monthly payments before getting a second mortgage.
With some planning, subordination can be a win-win for you and your lenders.
