Can I use my property to secure a business loan?

Property is the most common form of security for larger business loans. Offering it can mean a higher limit, a longer term and lower pricing than an unsecured loan. It can also help a business whose financials or credit history would limit its options.

For the basics of secured vs unsecured lending, read secured vs unsecured business loans. This article focuses on the property itself: how much you can use, the security position the lender takes, and what is at stake.

How property-backed business finance works

The borrower is usually your business. The property can be owned by the business, by you as a director, or by someone else who agrees to provide it. The lender registers its interest on the property’s title. If the loan isn’t repaid, the lender can enforce that security.

The property can be:

• Residential, such as your home or an investment property
• Commercial, such as offices, shops, warehouses or industrial units
• Other types, such as rural land or vacant land, which fewer lenders accept

If you own the property personally and the loan is to your company, you will usually sign a personal guarantee and give a mortgage over the property to support it.

First mortgage, second mortgage or caveat

The lender’s position on the title affects cost, speed and approval.

Position	What it means	Typical use
First mortgage	The lender is repaid first if the property is sold	Longer-term secured business loans, refinancing
Second mortgage	Registered behind an existing first mortgage	Borrowing against equity without refinancing the first loan
Caveat	A caveat lodged on the title to protect the lender’s interest	Short-term loans that need to settle quickly

A first mortgage is the strongest security and usually the cheapest. Second mortgages and caveats rank behind the first lender, so they usually cost more. Your existing first mortgage lender may need to consent to a second mortgage, and your first mortgage terms may restrict further borrowing. Check this early.

Our guide to caveat loans and bridging finance covers short-term options and exit strategies.

How much equity can I borrow against?

Equity is the gap between what the property is worth and what you owe on it. You can’t usually borrow against all of it, because lenders cap the loan-to-value ratio (LVR). Moneysmart defines LVR as the loan amount as a percentage of the asset’s value.

Usable equity is the amount you could borrow before you reach the lender’s maximum LVR.

Usable equity = (property value × maximum LVR) − existing debt secured on the property

Illustration only. These are round numbers, not any lender’s actual limits:

• Lender’s valuation: $1,000,000
• Existing home loan: $400,000
• Maximum LVR used for this example: 70%
• Maximum total lending: $1,000,000 × 70% = $700,000
• Usable equity: $700,000 − $400,000 = $300,000

The equity on paper is $600,000, but the usable equity in this example is $300,000. LVR limits vary by lender, by security type and by whether the lender takes a first or second position. The lender will also check that the business can service the new loan. What does LVR mean? has more worked examples, including combined LVR across two mortgages.

Bank, non-bank and private lenders

In general terms:

• Banks tend to have the lowest pricing and the strictest criteria. They want full financials, a clean credit history and strong serviceability. Approval can take longer.
• Non-bank lenders fund their loans from sources other than customer deposits. Many are more flexible on documentation, such as low-doc loans, and on credit history or ATO debt. Pricing is usually higher than banks.
• Private lenders focus mostly on the property and the exit strategy. They can often settle quickly and approve scenarios others won’t, but the cost is higher. Their loans are usually short-term.

The right choice depends on your timing, paperwork and credit, and on how long you need the money.

Consumer credit law and business loans

ASIC says the National Credit Code applies where credit is provided wholly or predominantly for personal, domestic or household purposes, or for residential investment property. ASIC’s guidance says “predominantly” means more than 50%. The test is about what the loan is for.

For business loans:

• Moneysmart says “responsible lending obligations do not apply to business loans”.
• ASIC says the law gives “the lowest level of protection to commercial loans, including loans to small businesses”.
• ASIC also says lenders that only provide commercial loans don’t need an Australian credit licence and aren’t legally required to be members of the Australian Financial Complaints Authority (AFCA). Some join voluntarily.

Some protections still apply under the ASIC Act, including against unconscionable conduct, misleading or deceptive conduct and unfair contract terms in standard form small business contracts. The practical point is that you need to protect yourself: read the contract closely and get independent advice.

Risks to your home

If your home secures a business loan, a business problem can become a housing problem.

• You could lose the property. Moneysmart warns that if you can’t pay, the lender may repossess an asset used as security, “such as your home or car”.
• Guarantees can cover the whole debt. Moneysmart says a guarantor may have to repay the whole loan plus interest.
• Your credit report can be affected. Moneysmart says the lender may record a default on your credit report if a guaranteed loan isn’t repaid.
• Co-owners are exposed too. If a spouse or family member co-owns the property, they will usually need to sign, and their interest is at risk as well.
• Short-term loans carry exit risk. If the sale or refinance you are relying on falls through, default terms can quickly increase what you owe.

Moneysmart recommends getting “independent accounting and legal advice before you sign”. It also suggests asking whether you can guarantee only part of a loan.

Step by step

1. Get a realistic idea of what the property is worth. Remember the lender will order its own valuation.
2. Get a payout figure for any existing loans secured on the property.
3. Work out your usable equity using the formula above. Test it with a conservative LVR.
4. Check whether your first mortgage allows further security, and whether your lender would need to consent.
5. Work out whether the business can afford the repayments from its own cash flow. Don’t rely on the property as your repayment plan.
6. Talk to everyone on the title. Anyone giving a guarantee or mortgage should get independent legal advice.
7. Compare commercial property finance, non-cashflow finance and specialist and private finance options on total cost, term and exit.

Important things to know

• Security doesn’t fix a cash flow problem. If the business is already struggling to pay its debts, borrowing against your home can make things worse. Read when borrowing is not the answer and speak with your accountant first.
• Valuations can be lower than you expect. A lower valuation increases your LVR and reduces how much you can borrow.
• Total cost matters more than the rate. Establishment, valuation, legal and discharge costs add up, especially on short-term loans.
• You can complain if something goes wrong. ASIC says AFCA can resolve complaints from small businesses about commercial lending, but only if the lender is an AFCA member. Check this before you sign.