Perspective | Interpretation and Practical Analysis of the Priority of Mortgage Rights in the Context of Borrowing New to Repay Old

"Borrow new to repay old" refers to the practice where, upon the expiration of the original loan contract, the borrower signs a new loan contract with the lender (or a new lending institution) and uses the funds obtained from the new loan to repay the principal and interest of the original loan. In fact, this operation is widely present in both the financial market and private lending, especially in the financial market. For borrowers, when they are unable to repay the full amount upon debt maturity, obtaining new funds through borrowing new to repay old helps avoid overdue or litigation crises, while also saving time and costs for re-establishing guarantees. For financial institutions, borrowing new to repay old can sometimes reduce the exposure of non-performing loans and retain relatively high-quality clients.
 

In "borrow new to repay old", if it is merely an extension of the same debt, the mortgage rights usually continue to be valid without the need for a change in mortgage registration. However, in practice, some borrowers prematurely sign mortgage contracts with other creditors and complete registration while the original debt has not yet been repaid and the mortgage registration has not been canceled or changed, leading to conflicts in the priority of mortgage rights. This phenomenon mainly arises from the following points:
 

1. Misunderstanding of Registration Effectiveness and "Uncanceled Registration"

Some parties, including some financial institutions, mistakenly believe that as long as the original mortgage contract has expired, the mortgage rights are deemed to have terminated, and thus do not timely cancel the registration. However, according to the Civil Code and relevant judicial interpretations, mortgage rights are extinguished only in cases such as repayment of the principal debt or waiver by the mortgagee, and do not automatically extinguish upon expiration.

2. Unclear Distinction Between "Borrow New to Repay Old" and "Extension" in Practical Operations

Although both "extension" and "borrow new to repay old" reflect the continuation of debt, there are substantial differences in terms of contract parties, debt composition, and scope of guarantees. Some parties fail to accurately distinguish between them, leading to subsequent disputes over whether they constitute "new debt" or "old debt", resulting in conflicts in guarantee effectiveness.

3. Vague Understanding of the Priority of Mortgage Rights

A common misconception in practice is that after the expiration of a registered mortgage right, if other creditors handle new mortgage registrations, their priority is automatically superior. In fact, as long as the original debt has not been actually repaid, the original mortgage rights have not truly extinguished, leaving room for dispute.

According to Article 16 of the "Interpretation of the Supreme People's Court on the Application of the Guarantee System Related to the Civil Code of the People's Republic of China": "If the parties to the main contract agree to use new loans to repay old loans, and the guarantor of the old loan agrees to continue to provide guarantees for the new loan while the registration of the old loan has not been canceled, and before signing the new loan contract, establishes a security interest in the guarantee property for other creditors, the people's court will not support the claim of other creditors that their security interest has priority over that of the new loan creditor."
 

This provision clarifies that under the "borrow new to repay old" model, if the original mortgage rights have not been canceled, and the guarantor explicitly agrees to continue using the original mortgaged property for the new loan guarantee, then the security interests established for other creditors during this period cannot claim priority over the new loan creditor.

1. "The parties to the main contract agree to use new loans to repay old loans"

This requirement indicates that there is a clear consensus between the parties on "borrowing new to repay old", with the new loan funds directed towards the repayment of the old loan debt. In judicial practice, this requirement usually needs to be determined in conjunction with the contract texts signed by the parties, actual payments, and the flow of funds.

2. "The guarantor of the old loan agrees to continue to provide guarantees for the new loan while the registration has not been canceled"

This emphasizes two aspects: first, the registration status of the old loan's mortgage rights is still valid and has not been canceled; second, the mortgagor (guarantor) voluntarily and knowingly continues to use the mortgaged property for the new loan guarantee, indicating that they recognize the continuity of the mortgage guarantee responsibility. In practice, the mortgagor (guarantor) signing a new guarantee contract is generally used as a condition to determine that they have agreed to continue providing guarantees for the new loan.

3. "Before signing the new loan contract, establishes a security interest in the guarantee property for other creditors"

This specifies the timing of the establishment of "other rights"—before the "new loan" is about to be established, the guarantor sets up a new mortgage or pledge on the same property, leading to multiple guarantees coexisting.

4. "If other creditors claim that their security interest has priority over that of the new loan creditor, the people's court will not support it"

In judicial practice, creditors of newly established guarantees often claim priority for repayment based on reasons such as "first to register" or "arising before the new loan". However, this provision clearly denies the priority in that order, protecting the priority interests of the old loan creditor and the guarantor in the context of "guarantee continuation".

1. Maintain Transaction Safety and Stability

The publicity function of the mortgage right relies on registration, but merely relying on registration that has not been canceled makes it difficult to guarantee that the legal relationship still exists. However, if the mortgagor has promised to continue to use the same mortgage to secure new loans, it can be regarded as a form of continuous protection for the security interest. This provision helps reduce disputes in the market arising from the cancellation of mortgage rights, maintaining the reasonable expectations and transaction security of both parties in the lending process.

2. Prevent malicious use of mortgage registration loopholes

Without this provision, the guarantor may maliciously take advantage of the gap period when the original mortgage registration has not been canceled, signing a new mortgage contract with a third-party creditor and registering it, thereby diluting or excluding the original creditor's priority right to repayment. This article effectively prevents such malicious exploitation of loopholes by denying the claims of other creditors for priority ranking.

3. Emphasize autonomy of will and procedural justice

From this article, it can be seen that the Supreme Court still emphasizes the genuine agreement between the parties. If it is not the case that "the parties to the main contract agree to use new loans to repay old loans," or if the guarantor has not explicitly agreed to continue the guarantee, this rule cannot naturally apply.

Basic case facts
 

In October 2020, Company A borrowed 5 million yuan from a certain bank (hereinafter referred to as Bank A), using a commercial property under its name as collateral and completing the mortgage registration, with Bank A as the mortgagee. Due to the debt not being repaid upon maturity, the two parties signed a new loan repayment agreement in September 2021, agreeing that Bank A would issue a new loan of 4 million yuan to repay the principal and interest of the previous debt. Company A made a written commitment that the mortgage would continue to secure the new debt, and the original mortgage registration had not been canceled.

However, during the negotiations between Company A and Bank A regarding the new loan repayment, Company A agreed to mortgage the commercial property to Company B (hereinafter referred to as Company B), which completed the mortgage registration in August 2021 and claimed that its mortgage right took precedence over Bank A's new loan debt.

Key points of the ruling

After hearing the case, the court found that Company A and Bank A had a clear agreement on "borrowing new to repay old," and that Bank A and Company A had signed a new supplementary agreement regarding the continued mortgage, and the original mortgage registration had not been canceled. Therefore, it should be recognized that Company A intended to continue to use the same property to secure the new debt. Although Company B's mortgage registration was slightly earlier than the effective date of Bank A's new loan contract, the property was still in the legal status of the "continued guarantee" agreement. According to Article 16 of the Civil Code and the Interpretation of the Guarantee System, Company B could not claim priority based on prior registration. The court ultimately ruled that Bank A's new loan mortgage had priority for repayment, and Company B's mortgage right was subordinate.

Case analysis

This case clarifies that "the order of registration" is not the only standard for judging priority ranking. When there is a "borrowing new to repay old" situation and the mortgagor's explicit consent is obtained, the effectiveness of the original mortgage right can be regarded as extending to the new debt. As long as this "extension" is in a legal state, later registrants, even if registered first, cannot oppose the priority of the new loan creditor. This aligns with the legislative intent of Article 16 of the Interpretation of the Guarantee System regarding the protection of priority in "borrowing new to repay old" mortgages.

Basic case facts
 

In 2019, Company B borrowed 30 million yuan from Bank C and provided the usage rights of industrial land and the factory building under its name as collateral, completing the mortgage registration. Later, due to difficulties in the company's capital turnover, the loan could not be fully repaid on time. Company B negotiated with Bank C to issue a new loan of 20 million yuan to partially repay the old debt, with the original collateral continuing to secure the new loan. In 2021, before formally signing the new loan agreement with Bank C, Company B signed a mortgage contract with Company D, mortgaging the same factory building to Company D and completing the mortgage registration. Subsequently, Bank C and Company B completed the new loan procedures, but Company D believed that its prior registration should take precedence.

Court ruling

After hearing the case, the court found that this case met the situation of "the parties to the main contract agreeing to use new loans to repay old loans," and both parties had reached an agreement to continue the mortgage. The court cited Article 16 of the Interpretation of the Guarantee System, ruling that Company D's claim was unfounded for the following reasons: (1) Company B and Bank C had clearly agreed to use the original collateral as security during the negotiations for the new loan; (2) the original mortgage registration was valid and had not been canceled; (3) Company B set up a mortgage for Company D during the negotiation phase with Bank C, intending to evade Bank C's priority right to the collateral, violating the principle of good faith.

The court ultimately ordered Bank C to have priority for repayment regarding the factory building within the scope of 20 million yuan, while Company D would be repaid from the remaining value.

Case analysis

This case further illustrates that as long as it can be proven that an agreement to borrow new to repay old has been reached and the original mortgage remains valid, regardless of whether third-party creditors have registered first, they cannot oppose the continued effectiveness of the prior mortgage. It also reminds financial institutions such as banks in practical operations to strengthen evidence preservation, proving the "borrowing new to repay old" agreement and the mortgagor's consistent expression of intent regarding "continued guarantee."

Basic case facts
 

A real estate company (hereinafter referred to as "the real estate company") obtained a trust loan of 50 million yuan from a trust company in 2018, providing project land use rights and construction projects as collateral. In 2020, the real estate company defaulted on repayment, but due to slow project progress and market changes, the real estate company and the trust company reached an agreement to add a loan of 15 million yuan to partially repay the original overdue principal and interest, and signed a new loan contract. The old loan and new loan formed a "borrowing new to repay old" relationship, and the real estate company explicitly agreed in the supplementary agreement to continue using the original collateral for the new loan, and the original mortgage registration remained valid.

During this period, the real estate company also had a dispute with a construction unit over project arrears. The construction unit, eager to realize its claim, reached a mortgage contract with the real estate company, mortgaging the project in construction and completing the registration. Later, as the trust company applied to the court to realize its security interest, the construction unit claimed that its mortgage registration was prior to the trust company's new loan registration and should take precedence.

Court ruling

The court believes that in this case, the actual debt relationship between the trust company and the real estate company has transformed from the original loan of 50 million yuan to (50 million yuan - repaid portion) + 15 million yuan new borrowing relationship, and both parties explicitly agreed to continue using the original collateral. Although the construction unit registered the mortgage before the new loan contract (supplementary agreement) was signed, it does not affect the continuation of the trust company's mortgage rights. According to Article 16 of the "Interpretation of the Guarantee System", the real estate company and the trust company constitute a legal case of borrowing new to repay old debts, and the original mortgage registration remains valid and does not naturally extinguish upon expiration. Therefore, the claim for priority repayment by the construction unit is not supported, and the trust company's mortgage rights on the construction project take precedence over those of the construction unit.

Case analysis

This case features multiple parties involved in the mortgage of the construction project, further illustrating the priority status of the continued mortgage rights in the "borrowing new to repay old" scenario. Although the construction unit has a real need for project debt, it should pay attention to the existence of the original mortgage registration and the explicit agreement between both parties regarding the continuation of the mortgage when signing the mortgage with the real estate company. Otherwise, once a dispute arises, the court will maintain the continuation of the original lender's mortgage rights based on Article 16 of the interpretation of the guarantee system.

From the above case and Article 16 of the "Interpretation of the Guarantee System", several key issues regarding the priority of mortgage rights under the "borrowing new to repay old" model can be distilled:

1. Determining borrowing new to repay old
 

(1) Whether there are outstanding old loans that have not been repaid;

(2) Whether the new loan funds are actually used to repay the old loan (must be combined with the flow of funds and repayment evidence);

(3) Whether the loan contract or related agreements explicitly state "used to repay old loans" and similar wording;

2. Situations of borrowing new but not repaying old

(1) Although the parties agree to issue a new loan, it is not actually used to repay the old loan, but rather the funds are diverted for other uses;

(2) The amount of the new loan far exceeds the old loan, and there is no genuine intention expressed to use it for repaying the old loan. This should be determined in conjunction with the evidence chain; if there is no evidence proving that the new loan is directed towards repaying the old loan, it is difficult to recognize the applicability of the protection under Article 16 of the interpretation of the guarantee system.

1. Based on the records of the registration authority
 

If the mortgage right is still registered in the real estate registration system, it indicates that the mortgage registration has not been applied for cancellation.

2. Whether the mortgage right has actually extinguished

Merely relying on the registration not being canceled is not sufficient to prove that the mortgage right continues to exist; it is also necessary to examine whether the original main debt has been repaid and whether the mortgagee has clearly waived it. Once it is found that the main debt has been fully repaid, or the mortgagee indicates a waiver, even if the registration has not been canceled, the mortgage right has also extinguished. When asserting the continuation of the mortgage, the parties should prove that the original debt has not been actually repaid and that the mortgage right has not been extinguished due to other statutory circumstances.

1. Can the original mortgage right "automatically" extend to secure new debts?
 

According to Article 402 of the "Civil Code" and the "Interpretation of the Guarantee System", the mortgage right has the characteristics of substitution and dependency, but for changes or increases in the main debt, it is generally difficult to automatically cover the additional parts without the consent of the mortgagor. Therefore, the mortgagor's consent to "continue to guarantee" must be reflected to have legal basis.

2. Is it necessary to re-register the mortgage?

If only the main debt is extended, in principle, re-registration is not required. However, if it constitutes "borrowing new to repay old", especially when the amount of the new debt undergoes significant adjustments and the scope of mortgage guarantee needs to be increased, it is advisable for the parties to clarify this through change registration or supplementary registration to avoid future disputes.

1. Due diligence and risk control
 

If a third-party creditor discovers that "the original mortgage registration has not been canceled" when accepting the mortgage, they must carefully assess whether the original debt has been genuinely repaid. If there is a lack of conclusive evidence proving that the original debt has been repaid or that the mortgage right has been waived, there is a significant risk of failing to obtain priority.

2. Require the mortgagor to handle relevant procedures in advance

Third-party creditors can require the mortgagor to provide proof that the original debt has been settled or assist in handling the cancellation or change registration procedures before entering into a new mortgage contract with the mortgagor, to ensure the authenticity and priority of their mortgage rights.

In judicial practice, it is still necessary to be vigilant against possible malicious collusion or fraudulent transactions between the parties. If borrowing new to repay old is not a genuine transaction, but rather a new contract fabricated by the parties to counter third-party creditors, once third-party creditors can prove that the contract is false, invalid, or maliciously colluding to harm third-party interests, the court will not mechanically apply Article 16 of the interpretation of the guarantee system, but will make a factual determination based on the case facts and may declare the "borrowing new to repay old" invalid.
 

Based on the above key issues and case analysis, the author proposes the following recommendations for practical operations regarding the priority of mortgage rights under the "borrowing new to repay old" model for reference:

1. Clear terms when signing the "borrowing new to repay old" agreement

In the new loan contract or supplementary agreement, clear provisions should be made regarding "the funds issued under this contract are used to repay the principal and interest owed under the original loan contract", "the original mortgage registration continues to be valid under this contract", and "the mortgagor's explicit indication of continuing to guarantee", and retain relevant signing evidence and documents.

2. Timely retain evidence of fund flow.

For the new loan to repay old debts transaction, the lender should design the transaction structure well in terms of fund investment, ensuring there are clear fund flow vouchers (such as bank statements, payment vouchers, etc.) to prove that the funds are actually used to repay old debts. For example, in the case of new loans to repay old debts in banks and other financial institutions, the new loan may not need to go through the borrower's account and can directly repay the old debt. This situation not only better preserves evidence but also avoids the possibility of the borrower misappropriating the funds. Therefore, only by locking in the fact that 'the new loan is used to repay the old loan' can one enjoy the priority protection established by Article 16 of the guarantee system interpretation in the event of a dispute.

3. Carefully review the status of the mortgaged property rights

The lender should confirm the registration status of the mortgaged property through ownership investigation and verification with the registration authority when re-signing the contract. If it is found that the registration may have been 'added' by another party during this period, the lender should communicate with the mortgagor immediately or inquire about the relevant registration information from the registration authority and keep the inquiry proof to facilitate subsequent claims of their rights.

4. Conduct moderate mortgage change registration or supplementary registration

Although according to Article 16 of the guarantee system interpretation, theoretically, the mortgage effect of the new debt can continue as long as the original mortgage registration has not been canceled, if there are changes in the scope of the debt or other key factors, it is still recommended to carry out mortgage change registration or sign a change contract to strengthen the publicity to third parties and reduce the risk of disputes.

5. Multi-party creditor negotiation

In practice, if the borrower has multiple debts or intends to introduce multiple creditors for financing, a corresponding multi-party negotiation mechanism should be established to let all parties understand the actual guarantee scope and priority of the mortgaged property. For potential conflicts and disputes, the priority should be agreed upon in advance in the contract, or joint credit, co-management, and other models should be adopted to ensure the right to know and expected interests of all creditors.

6. Emphasize honesty and prudence principles

'Borrowing new to repay old' must be based on real transactions and must not use false contracts or false debts to 'turn over' cash or evade the rights of other creditors. Once the court investigates and determines that there are malicious collusion behaviors, it may directly lead to the invalidity of the relevant contracts or mortgages.