Category: Investor Education
By Raise Private Capital | Raise Insights
Reading time: Approximately 5 minutes
First mortgage investments are a common form of property backed private credit in Australia. But how do they work, what protection does a first-ranking mortgage provide, and what should investors understand before committing their money?
When exploring private credit investments, you'll often come across opportunities described as being secured by a first-ranking mortgage.
It's an important feature, but what does it actually mean?
A first mortgage generally gives the mortgage holder priority over lenders with lower-ranking mortgages when money is recovered from the secured property.
That priority can be valuable if a borrower fails to repay.
However, it doesn't mean an investment is guaranteed, that the property can't lose value or that investors will necessarily recover all their money.
Understanding how first mortgage investments work is an important part of assessing property-backed private credit opportunities.
What is a first mortgage investment?
A first mortgage investment generally involves lending money to a borrower, with a first-ranking mortgage registered over property as security for the loan.
The borrower might be a property developer, business owner or another entity seeking finance.
Rather than borrowing from a traditional bank, the borrower may obtain funding through a private lender or investment structure.
For example, a property developer might borrow $3 million against a property valued at $5 million.
The lender could register a first-ranking mortgage over the property.
If the borrower fails to repay, the mortgage may provide rights to enforce the security, including selling the property to recover the outstanding debt.
The actual rights and recovery process depend on the mortgage documents and applicable law.
A first mortgage provides priority over certain other creditors. It does not guarantee repayment.
How does a first-ranking mortgage work?
Mortgage ranking determines the order in which mortgage holders are generally entitled to receive money from the secured property.
A first-ranking mortgage normally takes priority over a second-ranking mortgage.
Consider a simplified example.
A property is sold for $5 million, with the following debts outstanding:
Property sale proceeds: $5,000,000
First mortgage debt: $3,000,000
Second mortgage debt: $1,500,000
Remaining proceeds: $500,000
In this example, both mortgage holders could be repaid in full.
But what happens if the property sells for only $3.5 million?
The first mortgage holder would generally receive repayment ahead of the second mortgage holder.
After repaying the $3 million first mortgage, only $500,000 would remain for the second mortgage holder.
The second mortgage holder would therefore face a shortfall of $1 million.
These examples are hypothetical and exclude interest, enforcement expenses, fees, taxes and other claims that may affect actual recoveries. The order and amount of repayment depend on the applicable security arrangements and legal priorities.
This illustrates why mortgage ranking matters.
However, even a first mortgage holder can experience a loss if the property's sale proceeds are insufficient to repay the debt and associated costs.
What is a loan-to-value ratio (LVR)?
One of the measures used when assessing property-backed lending is the loan-to-value ratio, or LVR.
It compares the amount borrowed with the assessed value of the property securing the loan.
For example:
Property valuation: $5 million
Loan amount: $3 million
LVR: 60%
The calculation is:
$3 million ÷ $5 million × 100 = 60% LVR
In this example, the loan represents 60% of the property's assessed value.
The remaining 40% is the difference between the assessed property value and the loan amount. It is not necessarily cash available to repay investors.
A lower LVR generally provides a larger buffer against a fall in property value, all else being equal.
However, an LVR is only as useful as the information behind it.
Investors should consider whether the valuation is independent and current, whether it reflects the property's present condition or a future completed value, and whether other debts affect the security position.
A low LVR can reduce certain risks, but it cannot eliminate them.
Where do first mortgage investment returns come from?
First mortgage investments commonly generate returns through interest charged to borrowers.
For example, a private lender might provide funding to a property developer under an agreement requiring interest payments over a specified period.
Those payments may be used to fund distributions to investors.
Depending on the structure, investors might receive income monthly, quarterly or at the end of the investment term.
Some investments may also include additional returns linked to a project's completion or sale.
However, the amount and timing of distributions depend on the investment's terms and the borrower's ability to meet its obligations.
In some structures, interest may be capitalised or funded from loan proceeds rather than paid from the borrower's ongoing operating income.
This is an important distinction when considering the sustainability of distributions.
An advertised interest rate or target return is not a guarantee that investors will receive that amount.
Who actually holds the first mortgage?
Investors don't always hold the mortgage directly.
In some private credit structures, the mortgage is registered in the name of a security trustee or another appointed entity.
That entity may hold and enforce the security for the benefit of the relevant lenders or investors.
Investors may instead hold units in a fund, loan notes or another form of investment interest.
Their rights can differ significantly depending on the structure.
For example, holding units in a fund that makes first mortgage loans is not the same as personally holding a registered first mortgage over a property.
Before investing, it's worth understanding who holds the mortgage, whose obligations it secures, who can enforce it and how recovered money would reach investors.
What are the risks of first mortgage investments?
First-ranking mortgage security can be an important feature, but investors still face risks.
Property valuation risk
The underlying property may be worth less than expected, particularly if market conditions change or a development remains incomplete.
Borrower default
The borrower may fail to make interest payments or repay the loan at maturity.
Development and construction risk
Property developments may experience delays, cost increases, contractor problems or difficulties obtaining approvals.
Liquidity risk
Investors may be unable to withdraw their capital before the agreed maturity date.
Enforcement and recovery risk
If a borrower defaults, recovering money through the sale of a secured property can involve legal proceedings, delays and substantial costs.
Even after security is enforced, the amount recovered may be insufficient to repay investors in full.
Investors could lose some or all of their invested capital, even where a first-ranking mortgage is held.
What should investors check before investing?
When assessing a first mortgage investment, useful questions include:
What property or assets secure the loan?
Is the mortgage registered, and who holds it?
What is the current LVR, and how was the property valued?
Are there other debts or creditors with claims over the property?
Where will interest payments come from?
What is the expected investment term, and what is the contractual maturity date?
How does the borrower intend to repay the loan?
What happens if the borrower defaults or the property cannot be sold as expected?
The answers should be considered alongside the investment's information memorandum and other governing documents.
How Raise Private Capital approaches property-backed investments
At Raise Private Capital, we provide eligible wholesale investors with access to selected private market investment opportunities, including property-backed private credit.
Some opportunities involve first-ranking mortgage security, while others may use different security arrangements.
We believe investors should understand the structure behind an opportunity rather than focusing solely on the advertised return.
That includes understanding the underlying property, mortgage ranking, loan-to-value ratio, income arrangements, repayment strategy and the parties responsible for managing the investment.
Raise Private Capital is not necessarily the lender, issuer, trustee or security holder. Those roles depend on the particular investment and are identified in the relevant investment documents.
Our focus is on providing information about selected opportunities so eligible wholesale investors can examine their terms and associated risks.
First mortgage security: an important feature, not a guarantee
First-ranking mortgage security can provide valuable rights over property if a borrower fails to repay.
But the mortgage is only one part of the investment structure.
The property's value, the borrower's financial position, the repayment strategy and the legal arrangements all affect the potential outcome.
The question isn't simply whether an investment has a first mortgage. It's whether you understand what that mortgage secures, how it works and what could happen if repayment doesn't go to plan.
It's a principle that reflects Raise Private Capital's approach:
Structure Over Speculation.
Explore Private Investment Opportunities
Raise Private Capital provides eligible wholesale investors with access to selected private credit, property-backed and structured investment opportunities.
Explore our current opportunities to learn more about their investment structures, security arrangements and eligibility requirements.
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Investment opportunities are subject to eligibility requirements, availability and the terms of the relevant investment documents.
Raise Private Capital Pty Ltd (ABN 19 694 558 775) is a Corporate Authorised Representative (CAR No. 1320689) of True Oak Investments Pty Ltd (AFSL 238184).
This article provides general information without taking into account your objectives, financial situation or needs and does not constitute an offer to invest. Investment opportunities are available to wholesale clients only. Raise provides access to investments issued and managed by third parties. Before investing, read the relevant offer document, including its terms and risks. Capital and returns are not guaranteed. All investments carry risk, including the potential loss of capital.
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