First mortgage business loans

When a business needs a serious amount of money over a serious length of time, property in first position is usually where the conversation ends up. A first mortgage gives the lender the strongest security there is, and in return it typically offers the largest amounts and the longest terms available to a small business.

What first position means

A first mortgage is the first-ranking claim on a property. If the property were sold, the first mortgage lender is repaid before anyone else. That’s why it’s the least risky position for a lender and usually the cheapest for you compared with second mortgages or caveat loans.

You can get a first mortgage business loan in two ways:

1. Against property you own outright. No existing mortgage, so the business loan becomes the first.
2. By refinancing. The new lender pays out your existing mortgage and lends you more on top for the business.

What it suits

Use	Why first mortgage fits
Buying another business	Large amount, long payback
Buying premises	The property itself can be the security
Major equipment or fit-out	Long-lived assets suit long terms
Consolidating several business loans	One lower cost loan instead of many
Clearing a large ATO debt	Longer term keeps repayments manageable
Funding growth over years	Room to repay from future profits

Residential or commercial property

Both work. Residential property, such as your home or an investment unit, is the most common security for small business owners. Commercial property, like a warehouse, shop or office, is also widely accepted, though lenders may lend a lower share of its value because commercial property can take longer to sell. Some lenders consider rural or vacant land, usually at lower ratios again.

Paperwork levels

First mortgage business loans come at every paperwork level:

• Full doc. Tax returns and financials. Widest choice and usually the lowest cost.
• Low doc. Bank statements, BAS or an accountant’s letter.
• No doc. Mostly the property and your exit plan. Lower loan-to-value and higher cost, but very little paperwork.

If your returns are current, it’s usually worth going full doc for a first mortgage, because over a long term the cost difference adds up. Our full doc vs low doc comparison explains why.

Things to think about before refinancing

Refinancing a good home loan to fund the business isn’t always the best move. Weigh up:

• Whether your current home loan has a better deal than the new loan would.
• Any break costs if your home loan has a fixed portion.
• Mixing personal and business borrowing in one loan, which can complicate tax. Talk to your accountant about loan splits.
• Whether a second mortgage would let you keep your home loan as it is.

An illustrative example

A Toowoomba engineering business owns its workshop outright, valued at around $1.4 million. It wants $600,000 to buy a competitor’s business, including equipment and customer contracts. The directors’ returns are current and show steady profits. A first mortgage over the workshop, on full doc terms over a long period, gives them a repayment the combined business can comfortably support. Illustrative only.

How lenders value the property

Most lenders will order their own valuation rather than rely on your estimate or an online figure. For residential property this is usually straightforward. Commercial and specialised property can take longer and may come in lower than expected, especially if it’s tenanted on unusual terms or built for one specific use. It’s worth being conservative when you estimate what you can borrow, so a cautious valuation doesn’t derail your plans.

Choosing the term

A long term keeps repayments low, which helps cash flow, but it also means paying for longer. A good rule is to match the term to the life of what you’re funding. A business purchase you expect to pay off from profits over seven years suits a seven-year loan better than a twenty-five-year one. Ask whether you can make extra repayments without penalty, so you can clear the loan sooner in good years without being locked into a high repayment in lean ones.

Risks

A first mortgage is a long-term commitment backed by property. If the business can’t repay, the lender can sell the property. If it’s your home, think carefully about the worst case, involve anyone who co-owns it and get independent legal and financial advice before you sign.

Start with the property and the plan

Tell us about the property, what’s owed on it and what the business needs. There’s no credit check to make an enquiry, your details aren’t fired off to a crowd of lenders, and one real person reviews it and calls you. Accurate figures mean an accurate first match. Start your enquiry.