First Mortgage

A first mortgage is a primary loan taken out to purchase or refinance a property, secured by the property itself. It is called a “first” mortgage because it has priority over any other mortgages or liens on the property in the event of foreclosure. The borrower agrees to repay the loan amount, along with interest, over a specified period, typically 15 to 30 years. The first mortgage lender holds the first claim to the property’s value if the borrower defaults on the loan.

Importance of understanding first mortgages

Access to homeownership

A first mortgage is often the primary means by which individuals and families can purchase a home, making homeownership accessible without the need for full cash payment upfront.

Investment in property

For property investors, a first mortgage provides the financing needed to acquire real estate assets, enabling them to build a portfolio and generate rental income.

Financial planning

Understanding the terms, interest rates, and repayment schedules of a first mortgage is crucial for effective financial planning and budgeting.

Equity building

Repaying a first mortgage over time helps borrowers build equity in their property, which can be leveraged for future financial needs, such as home improvements or other investments.

Credit impact

Successfully managing a first mortgage can positively impact a borrower’s credit history and score, enhancing future borrowing opportunities.

Types of first mortgages

Fixed-rate mortgages

A fixed-rate mortgage has an interest rate that remains constant throughout the loan term, providing predictable monthly payments. This stability makes budgeting easier for borrowers.

Variable-rate mortgages

A variable-rate mortgage, also known as an adjustable-rate mortgage (ARM), has an interest rate that can change periodically based on market conditions. This can lead to fluctuating monthly payments.

Interest-only mortgages

With an interest-only mortgage, borrowers pay only the interest for a specified period, after which they must begin repaying both principal and interest. This can lower initial payments but may result in higher payments later.

Principal and interest mortgages

Principal and interest mortgages require borrowers to pay both the interest and a portion of the principal in each payment, reducing the loan balance over time.

Key components of first mortgages

Principal

The principal is the original loan amount borrowed to purchase the property. Each mortgage payment typically includes a portion that goes toward reducing the principal.

Interest rate

The interest rate is the cost of borrowing the principal. It can be fixed or variable and significantly impacts the total cost of the mortgage.

Loan term

The loan term is the period over which the borrower agrees to repay the mortgage. Common terms are 15, 20, or 30 years.

Amortisation

Amortisation is the process of gradually repaying the mortgage through regular payments over the loan term. Each payment includes both principal and interest.

Fees

First mortgages often come with additional fees, such as origination fees, application fees, and closing costs. These fees should be considered when evaluating mortgage options.

Loan-to-value ratio (LVR)

The LVR is the ratio of the loan amount to the appraised value of the property. A lower LVR indicates less risk for the lender and may result in better loan terms for the borrower.

Pros and cons

Pros of first mortgages

  • Access to homeownership: First mortgages make homeownership accessible by spreading the cost over many years.
  • Equity building: Regular mortgage payments help borrowers build equity in their property over time.
  • Fixed payments: Fixed-rate mortgages offer predictable payments, aiding in financial planning.
  • Tax benefits: In some cases, mortgage interest payments may be tax-deductible.
  • Credit improvement: Successfully managing a first mortgage can improve credit scores and borrowing opportunities.

Cons of first mortgages

  • Interest costs: Over the life of the loan, interest payments can significantly increase the total cost of the property.
  • Financial risk: If borrowers are unable to make payments, they risk foreclosure and losing their home.
  • Market fluctuations: Variable-rate mortgages can result in higher payments if interest rates rise.
  • Debt burden: A first mortgage is a long-term financial commitment that can impact other financial goals and obligations.
  • Additional fees: First mortgages come with various fees that add to the overall cost of borrowing.

Applications of first mortgages

Home purchases

First mortgages are primarily used to finance the purchase of residential properties, enabling individuals and families to buy homes.

Real estate investment

Investors use first mortgages to purchase investment properties, leveraging borrowed funds to maximise their return on investment.

Refinancing

Homeowners can refinance their existing mortgages to take advantage of lower interest rates, reduce monthly payments, or access equity for other financial needs.

Property development

Developers use first mortgages to finance the construction or renovation of residential and commercial properties.

Business premises

Businesses use first mortgages to purchase or refinance office buildings, retail spaces, and other commercial properties.

First mortgage in action

Consider a first-time home buyer in Sydney purchasing a $700,000 property with a $140,000 down payment. They secure a $560,000 fixed-rate first mortgage with a 3.5% interest rate over a 30-year term. The key aspects of this first mortgage scenario include:

  1. Principal: $560,000
  2. Interest rate: 3.5% per annum
  3. Loan term: 30 years
  4. Monthly payment: Approximately $2,513, including both principal and interest

By understanding the mortgage terms, the homebuyer can budget for their monthly payments and manage their finances effectively over the life of the loan.

Connection to financial planning

First mortgages are a crucial aspect of financial planning for individuals and businesses. Financial planners help clients understand mortgage options, assess affordability, and develop strategies to manage mortgage debt. Properly managing a first mortgage ensures financial stability and supports long-term financial goals.

Learn more

For more information on first mortgages and their implications, visit the following resources:

  1. What is a bridging loan? – Funding
  2. How does a bridging loan work? – Funding
  3. Apply for a bridging loan – Funding

Conclusion

First mortgages are the primary means of financing home purchases and property investments. Understanding the key components, benefits, and potential drawbacks of first mortgages is essential for making informed financial decisions. Whether for first-time home buyers, real estate investors, or those seeking to refinance, first mortgages play a vital role in achieving property ownership and financial stability. By effectively managing a first mortgage, borrowers can secure their desired property, build equity, and achieve their long-term financial goals.

DISCLAIMER: The information provided on this page is for general informational and educational purposes only and is never intended as financial advice. While we strive to ensure that the content is accurate and up-to-date, it may not reflect the most current legal or financial developments. Always consult with a qualified financial advisor or professional before making any financial decisions. Use the information at your own risk.

learning centre

Learning Centre

Move Forward Faster with insights and resources

At Funding, we understand that knowledge is power. Our Learning Centre is your ultimate resource hub for everything you need to know about property finance and investment. Whether you're a seasoned investor or just starting out, our expert insights, practical tips, and comprehensive guides will help you get ahead, sooner. Discover the Learning Centre today and propel your property ambitions.

Confidence grows with knowledge

Get ahead with our useful resources and expert insight.
Explore the differences between traditional bank and non-bank bridge lenders, how bridging loans work, and how Funding can offer a tailored solution f...
Read the blog
Understanding how a bridging loan can support your construction business is essential for managing cash flow, seizing opportunities, and completing pr...
Read the blog
A bridging loan can help by giving you immediate access to funds. It lets you confidently move forward without waiting to sell your old property. ...
Read the blog
Renovating your home can be an exciting journey, especially when it means transforming your space into the dream home you’ve always envisioned. But fo...
Read the blog

Explore the best investment opportunities and how the Funding Income Trust can be valuable to your investment strategy.

Read the blog
Explore how building loans can serve as a powerful financial tool for renovators, helping them bridge the gap between their current financial situatio...
Read the blog
Navigating the complexities of commercial construction projects requires not only expertise in construction but also a solid financial strategy. Secur...
Read the blog

Move Forward Faster

Reach your goals sooner with our borrowing and investing solutions.
arrow pattern