What is a First Mortgage?

Innovate Funding
6 hours ago
4 min read

A first mortgage is the primary and most senior loan secured against a property. It holds first priority on the property title, meaning that in the event of a sale or enforcement, the first mortgage lender is paid out before any other lender. Because of this priority position, first mortgage loans usually have lower interest rates and lower risk compared to second mortgages or caveat loans.

In private lending, first mortgages are commonly used for:

refinances
business-purpose cash-out
land purchases
development and construction
bridging finance
residual stock
investment property acquisition

To view Innovate Funding’s main product page, visit: First Mortgage Loans.

How a First Mortgage Works

When a borrower takes out a first mortgage:

The lender registers a mortgage on the property title
This registration gives the lender first priority security
The borrower receives funds for a business or investment purpose
Interest is paid monthly or capitalised (depending on structure)
When the loan is repaid, the mortgage is discharged from title

The lender holds the strongest possible security position, first mortgage loans attract:

lower pricing
higher maximum loan amounts
longer terms than second mortgages or caveat loans
simplified approval when equity is strong

For information about how lenders calculate maximum exposure, see: LVR & Lending Scope.

Why First Mortgages Offer Better Rates

A first mortgage gives a lender legal priority, which significantly reduces their risk.

Lower risk for the funder means:

lower interest rates
reduced fees
increased loan flexibility
better options for capitalised interest
longer loan terms (often 6–36 months)

This is why private lenders prefer first mortgage positions whenever possible.

First Mortgage vs Second Mortgage

Many borrowers ask whether a first or second mortgage is most suitable for their scenario.

First Mortgage

Primary loan on title
Lowest interest rates
Highest priority for the lender
Can support higher loan amounts
Suitable for refinances, purchases, development, and business cash-out

Second Mortgage

Sits behind the first mortgage
Higher rates due to higher lender risk
Used for equity release without refinancing
Suitable for short-term working capital or bridging needs

For more detail on second mortgages, visit: Second Mortgage Loans.

When Borrowers Choose a First Mortgage

Borrowers commonly choose a first mortgage when they:

want the cheapest possible rate
are refinancing an existing loan
need funds for a business or investment purpose
want higher loan amounts and longer terms
are acquiring property or land
are funding construction or development
are consolidating existing private loans into one facility
require capitalised interest to support cash flow

For developers, a first mortgage is often used alongside:

Private Lenders vs Banks: Key Differences

A bank first mortgage generally requires:

full financial statements
tax returns
strong credit history
long processing times
strict servicing criteria

A private first mortgage generally requires:

strong equity
acceptable loan purpose
clear exit strategy
business or investment use
commercial judgement rather than rigid policy

Private first mortgages are significantly faster, flexible and easier to obtain, especially for:

self-employed borrowers
investors
developers
borrowers with irregular income
clients with credit impairments

Typical Uses for First Mortgage Private Lending

1. Refinance

To pay out existing loans or consolidate debts.

2. Business Cash-Out

Using property equity to support business growth or short-term operations.

3. Property Purchase

Including residential, commercial or industrial assets.

4. Development and Construction

Funding land acquisition, early works, or full construction stages.

5. Bridging Loans

To fund purchases before a sale settles. See: Bridging Loans.

6. ATO / Tax Debt

Private lenders can provide first mortgages to pay ATO arrears, which banks typically avoid.

Example Scenario

A business owner in Melbourne needs $750,000 to purchase a warehouse. A major bank declines the application due to incomplete financials. A private lender offers a first mortgage at 65% LVR, with interest capitalised for 12 months. Settlement occurs in 5 business days. The borrower refinances to a bank once their financials are updated.

This is a typical example of how private first mortgages solve timing and documentation challenges.

Risks and Considerations

Borrowers should consider:

higher interest compared to traditional bank first mortgages
requirement for a clear exit
shorter terms than long-term bank facilities
valuation reliance
potential for capitalised interest to increase peak debt

Because of the strong security position, first mortgages remain the safest form of private lending for both borrower and lender.'

Quick Summary: What Makes a First Mortgage Unique?

A first mortgage:

is the primary loan registered on title
provides the lowest rate due to lowest lender risk
offers the highest borrowing capacity
is suitable for nearly all business or investment purposes
is the foundation of most private lending structures

Borrowers wanting the most cost-effective private lending solution typically start with first mortgage options.

FAQs About First Mortgages