A Senior-Subordinate loan structure is a ranking of debt. This is contrary to a standard mortgage where everything is split evenly (pro-rata).
This ranking structure creates two debt tiers that function similarly to a first and second mortgage on title. There are a few key similarities and differences.
Similarities to a standard mortgage
- Senior (1st) investor(s) assume a lower risk and yield, whereas subordinate (2nd) investor(s) assume a higher risk and yield.
- Senior tier investor(s) rank first for principal and interest payout.
- Senior tier allocations are larger and can be split with multiple investors.
Differences to a standard mortgage
- The main difference is that both allocations—senior and subordinate—form two parts of the same loan. Hosper manages the entire loan which is registered as a single charge on title.
Why we sometimes decide to use this structure
A single mortgage is a more appealing solution than two separate mortgages. This reduces paperwork and legal cost and allows us to collect a single monthly payment from the borrower. (which is a blended rate of the two investments).
Meanwhile, behind the scenes, we can create two distinct opportunities of unique yield and size, while still providing a single, simple solution for our borrower.
Senior-Subordinate Loan Example
A borrower is purchasing $1MM property. They have a $200K down payment and have requested an $800K first mortgage.
Property Value: $1,000,000.00
Total First Mortgage Loan Amount: $800,000.00
Senior Allocation: $650,000.00 (holds priority rank on title)
Subordinate Allocation: $150,000.00 (part of overall $800k loan, but acts as a 2nd mortgage)
LTV: is different for each allocation (65% and 80% respectively)
Rate: is different for each allocation (subordinate yields a higher return)
Order of payout upon sale of property:
- Legal costs and hard costs outlaid by the admin/lawyer
- Principal of senior lender
- Interest of senior lender
- Principal of subordinate lender
- Interest of subordinate lender
- Fees charged by Hosper Mortgage Administration (HMA) (if applicable)
- Interest bonus of senior lender (if applicable)
- Interest bonus of subordinate lender (if applicable)
- Remaining equity returned to the homeowner
If you have any questions about senior-subordinate loans, please contact your Hosper Investment Service Representative. No question is too big or too small – We’re happy to help!