First Mortgages: What You Need to Know
1st Mortgages are the most common type of mortgage offered by banks and private mortgage lenders. But before we get into all you need to know about first mortgages, it best to explain what a 1st mortgage actually is.
A mortgage is a legal instrument that gets placed on a land title in order to secure a debt against that property. The debt is therefore known as a mortgage.
If there are no other mortgages on the land title, the land title is known as being unencumbered. Which means there is no encumbrance on the land. Therefore there is no debt on the lend.
When a mortgage is applied to an unencumbered land title, that mortgage is then known as a 1st mortgage and has 1st ranking priority over that land, and remains until the debt is repaid.
However it is possible for the person who owns the property to get another mortgage against their land title. This additional mortgage is known as a 2nd mortgage as it sites behind the 1st mortgage. Therefore this means the 2nd mortgage has 2nd priority over the land.
So if the property gets sold, the 1st mortgagee gets its money first, and the 2nd mortgagee gets its money after that, so long as there is money left over.
This makes 2nd mortgages more expensive than 1st mortgages, due to the higher risk.
Why would someone need a 1st mortgage?
If you own a parcel of land, or a house or unit, and you need access to money, then you have two choices. Sell the real estate, or borrow against it. If you love the property and you don’t want to sell it, but you really need the money, a 1st mortgage is the perfect solution.
You simply get the money now, and pay it back over anywhere from 12 months to 30 years. Best of all, you still get the keep though property.
When you borrow money against your real estate assets, you are taking out a mortgage against the property.
This means if you don’t repay the loan when it is due, the mortgagee has the legal right to take possession of the property and sell it in order to get their money back.
So it’s important to seriously consider a few things…
- Do I really need the money?
- Can I afford to repay the money, with interest?
- What happens if I lose my job or my business fails?
Whilst mortgages are great, you need to ensure you can live with the cost of the mortgage and the impact it has on your disposable income.
Many Business Owners will also use a 1st mortgage to access cash for their business. This is like using the equity in your home to make more money in your business. Its pretty clever when you think about it, however again, you have to seriously think it through.
The best part about a 1st mortgage for business purposes is that the costs of the 1st mortgage loans, as well as the interest are fully tax deductible.
However this tax deductibility does not apply to normal home loan mortgages on your principal place of residence. (i.e.: your primary home where you live)
How do I get a 1st Mortgage?
You can apply for a first mortgage from your bank or non-bank lender, or private business lender. The first thing the lender will do is order a property valuation. This is so the lender knows how much the property is truly worth. However at Homesec Business Finance we do not require formal valuations.
The next thing is how much the lender will lend to you, using your property as security. Lenders will use a calculation known as a Loan to Valuation Ratio, or LVR. If the lender says they will lend to an LVR of 75%, this means they will lend you 75% of the property’s value.
Many people wonder why a bank or private mortgage lender won’t lend the full property value. This is because the mortgage lender needs a buffer in case you default of the loan and they have to sell the property to recover their money.
When a mortgage lender sells a property, there is going to be legal costs and agents commissions. Plus the property has to be sold quickly by the mortgagee, so a sale known as a Mortgagee In Possession sale. So with all of these things taken into consideration, this is why the mortgage lender can often only lend to 75% of the property value.
Watch Out For lenders Mortgage Insurance (LMI)
This only applies to 1st mortgages funded by banks for consumer purposes. LMI is an insurance that is applied to a loan with an LVR greater than 80%. The ironic part about Lenders Mortgage Insurance is the borrower pays for it, but it’s the lender that the insurance protects.
Lenders Mortgage Insurance is simply there to protect the 1st Mortgagees money in the event of a mortgagee sale and property sells for less than the LVR they lent at. As mentioned, LMI only applies to high LVR loans.
If at all possible, it is better if you can save a larger deposit and keep your loan under 80% LVR. This helps you avoid LMI, which will save you tens of thousands of dollars. LMI is essentially dead money to you, as you don’t see any of the benefits from it.
Unlike the banks and commercial lending institutions, Private 1st Mortgages are generally only up to 75% LVR. So LMI doesn’t apply to Private 1st Mortgages.
Private 1st Mortgages are often funder much fastest than bank mortgages, and often with less paperwork and less hoops to jump through. You may get less options with a private mortgage, and they may be a little more expensive, but the speed and convenience is definitely a lot better than a bank mortgage.
With any finance product, make sure you do your research and get the 1st mortgage that is right for you.