First mortgage business loans: borrowing in first position for business

A mortgage has a pecking order. When more than one lender has a claim on the same property, the order in which their mortgages were registered decides who is paid first if the property is sold to cover debts. The first mortgage sits at the top of that order. For a business owner with a property in good shape, it can be the cleanest route to a larger loan.

What does first position mean?

The lender holding a first mortgage has priority over any later mortgage. In practice, that makes first-position lending the most comfortable structure for the lender, because its claim is paid before others’. That comfort can support larger amounts and, depending on your circumstances, more flexibility.

Business.gov.au describes secured lending in the same terms: a loan backed by collateral, where the lender can take the security to cover losses if you do not repay. For a first mortgage, the lender’s rights come first.

When does a first mortgage suit a business?

Three situations come up most often.

1. The property is unencumbered. There is no existing mortgage, so a new first mortgage is the natural structure.
2. A refinance releases funds. An existing mortgage is paid out and replaced by a new first mortgage for a larger amount, with the difference available for business purposes.
3. A commercial property owned by the business. The premises themselves become security for working capital or expansion.

In each case, the question is whether the business needs an amount that turnover alone will not support. For smaller needs, unsecured funding, typically $5,000 to $500,000, may be simpler and lighter. See property or unsecured? for the decision in detail.

How much can I borrow?

Property-secured business loans run from $20,000 to $5,000,000. Inside that range, the amount depends on:

• the value and type of the property;
• the existing debt, if any;
• the purpose and how it will be repaid;
• the borrower’s circumstances, with credit issues and ATO debt considered case by case.

An illustration with no real property: a retail owner holds a freehold shop worth about $900,000 with no mortgage. She wants $250,000 to refit and restock. The equity is substantial, so a first mortgage is a realistic structure to discuss. Whether $250,000 fits, and on what terms, depends on the lender’s assessment of the property and of her plan to repay.

What happens if there is already a mortgage?

If you have a first mortgage with a bank, you have two main paths. You can ask the existing lender for more, or you can look at a second mortgage behind it. Or you can refinance the whole debt into a new first mortgage with a lender who will also release funds for your business. Each path has costs: exit fees on the old loan, establishment fees on the new one and possibly different terms. Add those up before deciding.

What do lenders ask for?

• Property details: address, type, title and any restrictions.
• Existing mortgage statements, if any.
• Identification for all owners.
• Business bank statements and your ABN or ACN.
• The purpose and plan: what the money is for and how it will be repaid.

Expect the lender to consider the property carefully. If the property is held by a company or trust, or has multiple owners, mention that early, because it affects the paperwork.

What are the risks?

A first mortgage is a serious commitment. If repayments are missed and the situation cannot be resolved, the lender can enforce its security, and that can mean the property is sold. Before you go ahead:

• stress-test the repayments against a bad month;
• get independent legal and financial advice;
• ask about every fee, including exit and early repayment fees;
• ask for the total cost of finance in dollars over the full term;
• plan the exit: will you repay, refinance or sell?

Business.gov.au points owners to accountants, advisers and free financial counselling services if finances are under pressure. Use them before, not after.

How do I compare structures?

Question	First mortgage	Second mortgage	Caveat loan
Already a mortgage on the property?	Not usually, or being refinanced	Yes	Either
Priority if enforced	First	Behind the first	Depends on registered interests
Typical reason	Larger amount, equity-rich property	Release more equity without disturbing the first loan	Speed when time is short

Each has trade-offs, and the right one is a conversation, not a table.

How does a first mortgage fit with the rest of my funding?

A first mortgage often forms the base of a funding structure, with other facilities layered around it. For instance, a first mortgage might fund a major project, while a business line of credit covers day-to-day swings. Or a first mortgage might consolidate older, scattered debts into one, easing monthly cash flow.

When you look at the whole picture, ask whether each piece of funding matches the job it is doing. Long-term assets are better funded long-term; short-term gaps are better funded short-term. Mismatches, such as using a short bridge for a permanent need, are where good businesses run into avoidable trouble.

Next step

If you have a property with room in it and a business that needs a bigger answer, make an enquiry. Tell us what the property is, what is owed, how much you want and what it is for. A lending specialist reads it and rings you. There is no credit check just to ask, and your details are not hurled at a long list of lenders.

Accurate answers about the property and the plan help us find the right structure first time. See if you qualify.