Quick answer
A first mortgage business loan is secured by first-ranking security over property, either unencumbered property or property whose existing loan is paid out by the new one. Because the lender is first in line, first mortgages usually offer the largest amounts, longest terms and lowest costs among property-backed options. They often take a little longer than a caveat, and are a common exit from short-term private debt.
Key points
- First in line, so usually the lowest cost property option.
- Suits larger amounts and terms of several years.
- Can pay out an existing home loan or short-term debt.
- Often the exit from a caveat or private second mortgage.
- Ranking
- First
- Typical term
- 1 to 30 years, by lender
- Lenders
- Banks, non-banks and private lenders
- Speed
- Up to $5m possible within 24–48 hours with a private lender once complete
When a business needs serious money for a serious length of time, the first mortgage is usually where it ends up. It’s the most secure position for a lender, which tends to make it the most affordable property-backed option for the borrower. It’s also the most common way out of short-term private lending once the urgency has passed.
When a first mortgage makes sense
- Unencumbered property. If you own a home, investment property or premises outright, a first mortgage over it can release a large amount on long terms.
- Replacing an existing loan. If your current mortgage is expiring, in arrears, or simply too small, a new first mortgage can pay it out and add the business funds on top.
- Refinancing short-term debt. A caveat loan or private second mortgage taken out for speed can be rolled into one first mortgage on a longer term.
- Larger purchases. Buying a business, premises or major plant often needs the scale a first mortgage can provide.
Bank, non-bank or private?
| Lender type | What they’re good at | Trade-off |
|---|---|---|
| Bank | Lowest cost for strong, well-documented borrowers | Slow, strict on financials and credit |
| Non-bank lender | Flexible documentation, decent terms | Costs a little more than a bank |
| Private lender | Fast decisions on equity and exit | Higher cost, shorter terms |
A common pattern is to start private for speed and finish with a bank or non-bank once the paperwork is in order. A first mortgage with a private lender can be in place within days, giving you time to prepare a bank application properly.
What a first mortgage lender needs
Expect more questions than a caveat lender would ask, especially from banks and non-banks:
- Property details, value and title.
- Statements for any loan being paid out.
- Business bank statements, and for banks, tax returns and financial statements.
- ID for every borrower and guarantor.
- The purpose and, for shorter private loans, the exit.
Lenders who accept lighter documentation, such as accountant declarations or bank statements in place of tax returns, are an option when the books are behind.
Choosing the term and repayment type
A longer term lowers each repayment but raises the total cost. A shorter term clears the debt sooner but asks more of monthly cash flow. Many business owners settle somewhere in between and make extra repayments in good months, so check that the loan allows that without a fee. You may also be offered interest-only repayments for a period. They can help while a new site or project ramps up, but the balance doesn’t fall during that time, so be sure you understand when principal repayments start and what they’ll be. If your income is seasonal, as it is for many farm, tourism and construction businesses, ask whether repayments can be matched to the months money actually comes in.
Paying out the old loan
If your property already has a mortgage, the new first lender pays it out at settlement. Before you start, ask your current lender for a payout figure and whether any break costs apply, particularly on a fixed rate. Discharge also takes time on the old lender’s side, so we ask for authority to request the payout early.
An illustrative example
A Toowoomba agricultural machinery dealer took a $300,000 caveat loan last year to cover a stock order while its accounts were being caught up. The accounts are now lodged and the dealership has had a strong season. It refinances the caveat, plus $150,000 for a new workshop, into a five-year first mortgage over the owners’ farm property with a non-bank lender. The monthly repayment is planned around seasonal income. Illustrative only.
Costs to ask about
Application or establishment fees, valuation and legal costs, any lender’s mortgage insurance on higher ratios, and ongoing account fees. For private first mortgages, ask how interest is charged, whether any is prepaid and what happens at the end of the term. Always look at the total cost over the time you expect to hold the loan.
Getting from short-term to long-term
If you’re already in a short-term property loan, the best time to plan the refinance is now, not the month it expires. Our guide to planning the exit lists what to start gathering and when.
Ask about a first mortgage
Tell us about the property, what’s owed, what you need and over what term. We don’t credit check you at enquiry, we don’t spread your details around the market, and one person will call you to talk through whether bank, non-bank or private suits you best. Honest answers save everybody time. Send an enquiry.
Frequently asked questions
Is a first mortgage business loan the same as a home loan?
Not quite. It may be secured on a home, but the money is for business purposes, so it's assessed as a business loan with different rules and documents.
Can a first mortgage pay out my existing home loan?
Yes. The new lender pays out the old loan at settlement and takes first position. Ask your current lender about any break costs first.
Why would I use a first mortgage instead of a second?
When the amount is large, when you want a longer term, or when the existing first loan is in arrears or expiring and needs replacing anyway.
Do private lenders offer first mortgages?
Yes, usually for shorter terms. They're often used when a bank won't lend yet, then refinanced to a bank later.