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July 2014 - When your first mortgage and second mortgages are both in arrears which one is your priority to pay first?

When your first mortgage and second mortgages are both in arrears which one is your priority to pay first?

☳ by Adam Aspilla

When you borrow money, interest expense represents about ninety percent of the borrowing cost, especially on unsecure debts like credit cards, and personal loans from finance companies and non-bank lenders.

To minimize the interest cost, you need to prioritize your payments. Meaning, you have to pay off first those debts with high interest. 

What about on secure debts like mortgage loans. There are three kinds of mortgages namely: first mortgage, second mortgage, and third mortgage. Since third mortgage is not as common as the first and the second mortgages, this article would focus on first and second mortgages.

A recent client of the writer had first and second mortgages both were in arrears and both mortgagees (the lenders) were threatening to issue power of sale. The arrears on the first mortgage was about $8,000.00, while the second mortgage arrears was about $3,000.00. Said client had $2,000.00 on his hand and he did not know to whom to pay first considering that the funds on his hand was not enough to pay off the arrears on both mortgages.

To avoid the issuance of power of sale both mortgages should be put in good standing for either mortgagee could issue a power of sale. 

Under normal circumstance, the first mortgage must be paid first, however, the said client has only $2,000.00 not even enough to update the arrears of the second mortgage. 

To pay only partial payment of the arrears on either the first or second mortgage would not stop the issuance of power of sale by either lender for both mortgages are still on default. 

One option on a circumstance like the above is to hold payments on both mortgages until you have accumulated enough funds to pay off in full both arrears, with the hope you can accumulate enough funds before a sheriff could enforce an eviction order resulting from a power sale action by either lender.

Should you are unable to produce the total amount needed to update the arrears within the period provided for on the Notice of Sale Under Mortgage, you also have an option to prolong the period provided on the Notice of Sale Under Mortgage. To do that, you need an advice or help from someone who has the expertise to help you, otherwise, you could be evicted from your house within ninety days from the date of the issuance of power of sale.

When your house in on the verge of a power of sale as on the above case scenario by the first or second mortgagee, your payment priority would be to the mortgagee that would stop the power of sale by both lenders. Otherwise, you may hold on your payments until you have the total amount to put in good standing both the first and the second mortgages.

To protect at least a portion if not all you have invested on your house on a power of sale, it is prudent that you seek advice from experts to explore all possible options to minimize your financial damage should you finally lose your house.  Do not just walk away from your house you love.



Adam Aspilla is a Senior Financial Counselor of the Debt Clinic of Canada Inc. and the author of the book, You Can Negotiate All Your Debts. He also writes a biweekly column, “What Matters In Life” in “Taliba Newspaper. For free initial, professional and confidential consultation, please call 905-306-7572.