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Senior-Subordinate loans: How they work and why we use them

Senior-Subordinate loans: How they work and why we use them

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:

  1. Legal costs and hard costs outlaid by the admin/lawyer
  2. Principal of senior lender
  3. Interest of senior lender
  4. Principal of subordinate lender
  5. Interest of subordinate lender
  6. Fees charged by Hosper Mortgage Administration (HMA) (if applicable)
  7. Interest bonus of senior lender (if applicable)
  8. Interest bonus of subordinate lender (if applicable)
  9. 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!