Equity release for business: turn property value into working funds

Plenty of Australian business owners are asset rich and cash tight. The company is trading well, but the money is tied up in stock, debtors and growth, while the real store of value sits in a house, a warehouse or a block of land. Equity release is the bridge between the two. It lets a company borrow against property value that already exists, rather than waiting for cash flow to catch up.

How lenders work out usable equity

The first thing to understand is that lenders don’t lend against all of your equity. They lend up to a maximum share of the property’s value, known as the loan-to-value ratio or LVR, and then subtract what is already owed. The rest is usable equity.

Here is the logic in plain terms. A property is valued by an independent valuer chosen by the lender. The lender applies its maximum LVR for that type of property and loan. From that figure it takes away the balance of every loan already secured on the property. Whatever is left is the most it could add, subject to your ability to repay.

Two owners with the same property value and the same debt can get different answers, because LVR limits change with the property type, location, the lender and whether the new loan sits in first or second position. Our property equity and LVR calculator lets you test a few scenarios, and our explainer on loan-to-value ratios goes deeper on why limits vary.

Which properties can be used

Most equity release in business lending is secured by one of three property types.

Residential property. A director’s home or an investment property is the most common security of all. It is easy to value and easy to sell, so lenders are comfortable with it. If it’s your home, the stakes are personal, and that deserves a careful conversation about the worst case.

Commercial and industrial property. Shops, offices, warehouses and factories can all secure a loan. Valuations take longer and depend heavily on leases and location. See our page on commercial property loans for the details lenders focus on.

Vacant land and rural property. These can work, but lenders are more cautious, so expect lower LVR limits and a closer look at how quickly the property could be sold.

The owner doesn’t have to be the company. Property held personally by a director, by a family trust or by a related company can secure a loan to the trading company, as long as the owner agrees and signs the right documents.

First mortgage or second mortgage?

There are two ways to release equity. The first is to refinance the existing loan and take a larger first mortgage, which gives one lender, one repayment and usually the sharpest pricing. The second is to leave the existing loan alone and add a second mortgage behind it. A second mortgage is often faster and avoids breaking a good existing loan, but it usually costs more and needs the first lender’s attention.

Which is right depends on the size of the existing loan, any break costs, how quickly you need the money and how long you intend to keep the debt. We’ll show you both paths side by side if both are available.

What equity release is commonly used for

Because the money comes from your own property value, equity release is flexible. Typical uses include buying stock ahead of a busy season, funding a fit-out or new premises, buying equipment outright, clearing an ATO debt, paying out a business partner, or setting aside a buffer so the company isn’t living week to week.

The common thread is purpose. A lender will ask what the money is for and how it will be repaid. A purpose that grows or protects the business, with a believable plan to service the loan, is far stronger than a vague request for extra funds.

Risks worth thinking through

Releasing equity converts a quiet asset into a working one, and that cuts both ways. The property is now exposed to the company’s fortunes. If trading turns, the lender can ultimately rely on the security. Before you sign, ask yourself how the loan would be repaid if revenue dropped for six months, whether the term matches the use of the money, and what the total cost is over the life of the loan rather than the first year alone.

It also pays to check how the new loan affects your personal position. Guarantees, joint ownership with a partner and existing family loans can all complicate things. Independent legal advice is often required by lenders anyway, and it’s worth taking seriously rather than treating as a box to tick.

What to have ready

You’ll move faster with a few things to hand: a recent rates notice or title details for the property, statements for any existing loans on it, the company’s recent business bank statements, and a short note on what the funds are for. If the property is in a trust, have the trust deed available. A rough idea of value, such as a recent appraisal, helps us give you an early indication.

Find out what your property could support

Tell us about the property, what’s owed against it and what your company needs, using our short enquiry form. Asking costs nothing and involves no credit check. One team handles your file, and you’ll speak with a real person who can explain what a lender is likely to offer and which structure fits. Start your enquiry.