First mortgage business loans: when the lender takes first place on the title

In property lending, position is everything. A first mortgage business loan puts the lender at the front of the queue on the title, which makes it the strongest security a lender can hold and, for the borrower, usually the best-priced way to borrow against property. The catch is simple: there can only be one first mortgage on a title at a time.

That leaves two routes in. Either the property has no loan on it, or you refinance the loan that’s there and take the extra you need in the same transaction. This page explains both, and how to tell whether first position is worth the extra steps.

Why does first position matter so much?

When more than one mortgage is registered on a title, they rank in order. Queensland’s Land Title Practice Manual spells out that documents “must be registered in the order in which they are lodged” and that mortgages take priority by lodgement time. Ranking can be changed by formal agreement between lenders, but without one the first-registered mortgage is repaid first on a sale.

For a lender, first position means less can go wrong. For you, that usually means:

• Better pricing than a second mortgage or a caveat loan over the same property.
• Larger amounts relative to the property’s value.
• Longer terms where the lender’s model allows it.

When does a first mortgage business loan make sense?

The property is debt-free. Owners who have paid off a home, an investment unit or their business premises can borrow against it directly. This is the simplest version and often the quickest to settle.

You want one loan instead of two. If your existing mortgage is small, on an ordinary variable rate, or with a lender who won’t help the business, refinancing it into a single first mortgage can be tidier than adding a second loan behind it.

The current lender is the problem. Some owners are stuck with a bank that won’t extend credit after a bad year, a default or a tax debt. A private first mortgage pays that bank out, releases equity for the business and gives breathing room to rebuild.

You’re buying or refinancing commercial premises as part of the business plan. The commercial property loans page covers purchases in more depth.

If you’re unsure which applies, run your situation past us and we’ll tell you whether first position fits.

First mortgage, second mortgage or caveat?

	First mortgage	Second mortgage	Caveat loan
Rank on title	First	Behind an existing mortgage	Recorded interest, not a registered mortgage
Existing loan	Must be clear or refinanced	Stays in place	Usually stays in place
Relative cost	Lowest of the three	Higher	Highest
Typical term	Short to long	Short to medium	Short
Suits	Debt-free property, consolidation	Keeping a good home loan	Quick, short-term needs

The secured business loans overview explains how lenders size each one.

What does a lender check?

A first mortgage lender wants a clean picture of four things:

• The title. Who owns the property, whether there are other interests recorded, and what’s owing.
• The property. Type, location and saleability. Standard homes and commercial units are easiest; special-purpose buildings, rural land and very large properties take longer.
• The purpose. What the business will do with the money: working capital, an acquisition, plant, clearing ATO debt or refinancing other business debt.
• The exit. How the loan will be repaid: business cash flow, a property sale, or a refinance to a bank when the numbers support it.

The government’s business.gov.au funding guide recommends having financial and bank statements and cash flow projections ready for any business loan. A private first mortgage lender may need less than a bank, but organised paperwork always speeds things up.

What does it cost to refinance into a first mortgage?

Pricing is set on the borrower’s circumstances: the property, the amount, the term and the business’s position. First position typically prices better than other forms of property security, but there are refinancing costs to weigh:

• Break costs if your current loan is on a fixed rate.
• Discharge fees from the outgoing lender.
• Establishment and legal costs for the new loan.
• Registration costs for the new mortgage and the discharge.

At settlement the outgoing lender lodges a discharge, the new mortgage is registered, and, as NSW Land Registry Services notes, a title search will confirm the old mortgage has gone.

Illustrative example

Illustrative example: Two directors own the warehouse their wholesale business operates from. It’s worth about $2m and has $300k owing to a bank that has declined to increase the facility after a loss-making year caused by a freight dispute. The business needs $500k to buy stock ahead of a large retail contract. A private lender refinances the warehouse with a single $800k first mortgage: $300k pays out the bank and $500k goes to the business. The directors plan to move back to a bank once two profitable years are on record. One loan, one lender, first position, and a clear way home.

Common mistakes

• Refinancing a cheap loan unnecessarily. If your existing loan is on a great fixed rate, a second mortgage might cost less overall.
• Ignoring break costs until settlement week.
• Under-explaining the purpose. “Business use” isn’t enough; say exactly what the money does.
• No exit plan for a private first mortgage. Short-term money needs a dated plan.
• Forgetting who owns the property. If the title is in a spouse’s name or a family trust, every owner signs the security documents. Get them on board before you apply, not the week of settlement.
• Lumping personal debts into the refinance. These loans are for business purposes only, so keep the purpose clean and documented.

Does the business structure change anything?

Not much, but it pays to be clear. The borrower is usually the company or trust that runs the business, and the property owner gives the mortgage, which might be the same entity or might be a director personally. Lenders typically ask directors for personal guarantees as well. If the business is a sole trader or partnership, the owners borrow in their own names for a business purpose. Whatever the structure, lenders want to see the ABN or ACN, who the directors or partners are, and how the property owner connects to the business.

Want to know if first position works for you?

Whether your property is debt-free or you’re ready to roll an existing loan into one, the quickest way to find out what’s possible is a short enquiry. It takes about a minute and doesn’t touch your credit file. We don’t send your details out to a list of lenders; a real person studies your property, purpose and plan and rings you back. Be as accurate as you can with the property value and anything owing, and the first option you hear about will be a realistic one.

Talk to us about a first mortgage →