Using your home as security for a business loan

For most Australian business owners, the biggest asset they own is their home. It’s also the security private lenders find easiest to work with. That combination makes it the most common security for private business loans, and the one that deserves the most thought.

Why lenders like residential property

A house or unit in an established area has a deep pool of buyers, plenty of comparable sales and predictable values. If a lender ever had to sell, it could do so relatively quickly. That’s why residential property usually supports:

• higher loan-to-value ratios than commercial, rural or vacant land
• faster valuations, sometimes desktop or kerbside for smaller loans
• the widest choice of private lenders

Three ways to borrow against your home

Your situation	Usual structure
Home loan you want to keep, need funds fast	Caveat loan
Home loan you want to keep, larger amount or longer term	Second mortgage
No home loan, or the home loan needs replacing	Private first mortgage

What the lender checks on a home

• Value and location, including recent comparable sales nearby
• Existing mortgage balance and whether it’s up to date
• Who’s on title, because every registered owner must sign
• Condition, such as any major defects or unapproved structures
• Other interests on title, like caveats, easements or writs

When it’s the family home: extra care

Using the family home is a big decision, and a good lender will treat it as one.

1. Talk to everyone on title. A spouse or partner who isn’t in the business still has to sign and will usually need their own legal advice.
2. Borrow only what solves the problem. Keep the combined LVR comfortable so a delay doesn’t become a crisis.
3. Make the exit specific. A sale of another asset, a refinance or a contracted payment is stronger than hoping trading improves.
4. Plan B. Know what you’d do if the main exit slipped by three months.

If the honest answer is that the business can’t repay without a miracle, borrowing against the home isn’t the solution. We’ll tell you if we think that’s the case.

Business purpose, not home loan

Even though your home secures it, this is a business loan. You’ll sign a declaration that the funds are predominantly for business purposes. It’s important to get this right: using a business purpose loan for personal spending can cause real problems. Our business purpose declaration guide explains why.

Keeping the home out of it

If you have an investment property or commercial property with enough equity, many lenders will happily secure against that instead. It’s always worth asking.

A worked example: the home that saved the contract

A Redcliffe electrician running a crew of eight won a commercial fit-out worth well over a million dollars. The builder paid monthly in arrears, and the first progress claim wouldn’t land for seven weeks. Materials, hire equipment and wages had to be funded upfront, and the shortfall was about $240,000.

The bank offered a modest overdraft increase after a month of assessment. That wasn’t enough, and it wasn’t soon enough. The electrician and his partner owned their home with roughly $500,000 of equity behind an existing bank loan.

A private lender took a second mortgage over the home for $260,000, which covered the gap plus the lender’s fees. Because it was the family home, both owners received independent legal advice, and the lender confirmed in writing that the loan was for business purposes. Interest was prepaid from the advance for nine months, so there were no repayments while the job ramped up.

Progress claims started arriving on schedule. The business cleared the loan in seven months and kept the home’s first mortgage untouched throughout.

Signs your home is strong security

• it’s a freestanding house or a townhouse on its own title in an established suburb
• there are plenty of recent sales of similar homes nearby
• the existing loan is with a mainstream lender and up to date
• council rates are paid and there are no unusual title notifications
• every owner on title understands the purpose and is willing to sign

If one or two of these don’t apply, a lender can still help. It just means the amount or the speed may change, so mention it upfront.

Check what your home could support

Tell us the home’s estimated value, what’s owed, who’s on title and what the business needs. We’ll give you a realistic picture before anyone orders a valuation. There’s no credit check when you first enquire, and your details stay with our desk.

Accurate figures for value and existing debt help us match you correctly first time. See if you qualify, or run your numbers through the second mortgage calculator and then send them to us.