If you are exploring private finance for a commercial deal in Australia, you will encounter the term "first mortgage" early and often. It is one of the most fundamental concepts in secured lending, yet many borrowers — particularly those new to the private lending market — are not entirely clear on what it means and why it matters. This guide breaks it down.
What Is a First Mortgage?
A first mortgage is the primary security interest registered against a property. When a lender holds a first mortgage, they have the highest-priority claim on the property in the event of a default. If the borrower cannot repay the loan and the property needs to be sold, the first mortgage holder is paid out before any other creditors with registered interests on the same property.
This is distinct from a second mortgage (also called a second charge or caveat position), where the lender sits behind the first mortgage holder in the priority queue. If the property is sold, the first mortgage is repaid in full before the second mortgage holder receives anything.
For this reason, first mortgage lending is considered lower risk than second mortgage lending, and this is reflected in the pricing. First mortgage rates in the Australian private lending market typically start from around 10% per annum, while second mortgage rates are substantially higher to compensate for the increased risk.
Why Lenders Prefer First Mortgage Positions
From a lender's perspective, holding a first mortgage provides the strongest possible security position. It means that in a worst-case scenario — where the borrower defaults and the property must be sold — the lender has first claim on the proceeds. This significantly reduces the risk of capital loss.
Most reputable private lenders in Australia will only lend on a first mortgage basis. At Esteb Capital, for example, all lending is secured by first mortgages. This disciplined approach protects our capital and, importantly, ensures that the deals we fund are structured in a way that gives borrowers the best chance of a successful outcome.
When a lender insists on first mortgage security, it is also a signal to borrowers that the lender is conservative and responsible. Lenders who routinely take second mortgage positions or lend on weaker security may be taking risks that ultimately harm borrowers if things go wrong.
What First Mortgage Lending Means for Borrowers
For borrowers, understanding first mortgage lending is important for several practical reasons:
Your Property Must Be Unencumbered or the Existing Mortgage Discharged
To offer a first mortgage to a new lender, the property must either be free of any existing mortgage or the existing mortgage must be discharged as part of the new loan settlement. This means if you have a current bank loan on the property, the private lender's funds would typically be used to pay out the existing bank loan first, with the remaining balance available for your intended purpose.
Loan-to-Value Ratios Are Conservative
Private lenders on a first mortgage basis generally lend up to 65% to 75% of the property's value, depending on the asset type and location. This conservative approach ensures there is adequate equity buffer in the security, protecting both the lender and the borrower. If property values decline during the loan term, a lower LVR provides a safety margin.
Rates Reflect the Security Position
Because a first mortgage is the strongest security position available, borrowers benefit from lower rates compared to second mortgage or unsecured lending. In the current Australian private lending market, first mortgage rates typically start from 10% per annum. The exact rate will depend on factors including the LVR, property type, location, and the overall risk profile of the deal.
The Exit Strategy Is Critical
Every first mortgage private loan requires a clear exit strategy — the plan for how the loan will be repaid at the end of the term. This is non-negotiable with any responsible lender. Common exit strategies include refinancing to a traditional bank, selling the property, or completing a development and selling the finished product.
A strong exit strategy benefits the borrower as much as the lender. It forces disciplined thinking about the deal's timeline and ensures the borrower has a realistic path to repaying the loan without financial stress.
Types of Properties Used as First Mortgage Security
Private lenders accept a range of commercial property types as first mortgage security. Common examples include:
- Commercial property: Office buildings, retail premises, warehouses, and industrial units.
- Residential investment property: Rental properties held for investment purposes (not owner-occupied consumer lending).
- Development sites: Land with development approval or zoning that supports future development.
- Rural and regional property: Farms, rural commercial properties, and regional assets, though these may attract different LVR and pricing considerations.
- Specialised assets: Hotels, childcare centres, medical suites, and other specialised commercial properties.
The key factor is the property's market value and how readily it could be sold in the open market if necessary. Properties that are easily valued and readily saleable will generally attract better terms than highly specialised or illiquid assets.
The Borrower's Obligations
When borrowing on a first mortgage basis from a private lender, borrowers should be aware of their key obligations:
- Interest payments: Most private loans are structured as interest-only, with payments due monthly. The minimum term is typically six to twelve months.
- Legal costs: All legal costs associated with the loan — including the lender's legal costs — are borne by the borrower. This is standard practice in the private lending market across Australia.
- Property insurance: The borrower must maintain adequate insurance on the security property for the duration of the loan.
- Compliance with loan conditions: This may include maintaining the property, not further encumbering the security without consent, and adhering to any specific conditions outlined in the loan agreement.
Is First Mortgage Private Lending Right for Your Deal?
First mortgage private lending works best for borrowers with genuine commercial or business needs who have strong property security and a clear exit strategy. It is particularly well-suited to short-term requirements where speed and certainty are more important than achieving the lowest possible interest rate.
If you have a property asset that can support a first mortgage, a legitimate business purpose for the funds, and a realistic plan to repay within six to twelve months, private lending is worth exploring. Esteb Capital provides first mortgage lending from 10% for business and commercial purposes across Australia. We assess every deal individually and provide straightforward answers. Reach out to discuss your specific situation.