First Lien

A first lien is a legal claim or right against a property or asset that takes priority over all other liens or claims. This type of lien is the primary obligation that must be satisfied before any other liens are paid off. In the context of loans, a first lien typically refers to the primary mortgage or loan secured by a property, which must be repaid before any other subordinate liens, such as second mortgages or home equity lines of credit, can be addressed.

Importance of understanding first liens

Priority in repayment

Understanding first liens is crucial because they determine the order of repayment in the event of default or foreclosure. The holder of the first lien has the primary right to repayment from the proceeds of the sale of the property before any other lienholders.

Risk assessment

Lenders need to assess the risk associated with lending. Knowing that their loan will be secured by a first lien provides them with greater security and confidence that they will be repaid before other creditors.

Legal implications

First liens have significant legal implications for both borrowers and lenders. They establish the priority of claims and affect the legal rights of all parties involved in the transaction.

Financial planning

For borrowers, understanding the implications of a first lien helps in financial planning and managing their obligations. It ensures they are aware of the priority of their debts and the potential consequences in case of default.

Key components of a first lien

Secured debt: A first lien secures a debt with a specific asset, most commonly real estate. The lien gives the lender a legal right to the asset in case the borrower defaults on the loan.

Property claim: The first lien holder has a priority claim over the asset, meaning they are the first to be repaid from the proceeds of the asset’s sale. Other lien holders, such as those with second or third liens, can only be paid after the first lien holder is satisfied.

Recording and perfection: To establish the priority of a first lien, it must be properly recorded with the appropriate government authority, such as the land titles office. This process, known as “perfection,” ensures the lien is legally enforceable and publicly acknowledged.

Subordination: A first lien takes precedence over subordinate liens, which are often referred to as second or junior liens. Subordinate lien holders agree to be paid after the first lien holder in case of default.

Applications of first liens

Mortgages

First liens are most commonly associated with mortgages and property securing. The primary mortgage on a property is typically secured, giving the lender priority in repayment if the borrower defaults.

Commercial loans

In commercial lending, first liens are used to secure loans with business assets, such as real estate, equipment, or inventory. This provides lenders with security and priority in repayment.

Construction loans

Construction loans are often secured by first liens on the property being developed. This ensures that the lender has a primary claim on the property in case of default.

Refinancing

When refinancing a loan, the new loan can replace the original loan and take on the first lien position, ensuring the new lender has priority in repayment

Get started

First liens play a crucial role in various loan scenarios, including building loans, bridging loans, and business loans. For instance, a lender providing a building loan for property development will typically secure the loan with a first lien on the property. Similarly, income trusts that invest in real estate or other assets may use first liens to secure their investments and ensure priority in repayment.

Learn more

For more information visit the Australian Securities and Investments Commission (ASIC) website.