How much equity do you need for a secured business loan?

When a cash flow lender says no, the next question is almost always the same: what could my property support? It’s the right question, and you can get a useful answer in a few minutes with three numbers. This guide shows how a lender thinks about it, so your estimate lines up with what you’re eventually offered.

Equity and usable equity are different things

Equity is the simple part: what the property is worth, minus what’s owed on it. A home worth $1,000,000 with a $400,000 loan has $600,000 of equity.

Usable equity is what a lender will actually lend against. No lender will advance the whole $600,000, because it needs a margin of safety in case the property has to be sold in a hurry. So it applies a maximum loan-to-value ratio, or LVR. If the lender’s maximum for that loan were 70%, total debt on the property could reach $700,000. Take away the existing $400,000 and $300,000 is the most it could add.

So the sum has three steps:

1. Start with the lender’s valuation of the property.
2. Multiply it by the lender’s maximum LVR.
3. Subtract every loan already secured on the property.

What remains is usable equity, before the lender tests the repayment or the exit.

Why the valuation matters most

Everything flows from the first number, and the first number is the lender’s, not yours. An independent valuer, chosen by the lender, estimates what the property would reliably sell for. That figure is often lower than an agent’s appraisal, which is aimed at winning a listing. A difference of a few per cent is common, and on a large property that’s a lot of dollars.

You can’t control the valuer, but you can prepare. Have recent comparable sales ready, list improvements and when they were done, and make sure the valuer has access and any leases. Our page on property valuations explains what valuers look at and what to do if the figure is lower than expected.

Why the LVR limit varies

The maximum LVR isn’t a fixed number. It depends on:

• Property type. Standard residential homes in major cities usually attract the highest limits. Commercial, industrial, rural and vacant land attract lower ones.
• Location. Properties in areas with plenty of comparable sales are favoured over remote or thinly traded ones.
• Loan position. A first mortgage is safer for the lender than a second mortgage or caveat, so limits are usually lower further back in the queue.
• The lender’s appetite. It shifts with market conditions and the lender’s own funding.
• The rest of your file. A clear exit and a strong overall position can support more.

Because of that, the sensible approach is to ask what the current limit is for your property type and loan position, rather than relying on a rule of thumb.

Second mortgages: the combined debt counts

If you already have a home loan or commercial mortgage, a second mortgage sits behind it. The lender looks at the combined debt, first mortgage plus the new loan, against the valuation. If your first mortgage already takes you close to the limit, there may be little room. If it’s modest, there may be plenty.

It’s also worth knowing that the first mortgage lender may need to be told, and in some cases to consent. That’s a process question rather than an equity one, but it affects timing.

Using more than one property

If one property isn’t enough, a second can be added as security, and the lender looks at the combined position. A director’s home and an investment property together might support a much larger loan than either alone. It also puts more at stake, so think carefully about which assets you’re comfortable offering, and make sure every owner understands what they’re signing.

From equity to an actual offer

Usable equity is a ceiling, not an offer. The lender will also consider what the loan is for, how it will be repaid, whether the repayments are sensible and any issues with the title or the borrower. For short-term loans, the exit strategy matters as much as the equity. Bad credit and ATO debt are considered, rather than ruling you out, when the equity is strong.

It’s also worth borrowing less than the ceiling if you can. A loan well inside the limit leaves room for an extension, costs less and leaves you more options when it comes time to refinance.

A quick worked example

A director owns a house valued by the lender at $1,200,000, with a home loan of $500,000. A lender’s maximum combined LVR for a second mortgage on that kind of property might allow total debt of, say, $840,000. Taking away the existing $500,000 leaves about $340,000 of usable equity. The director needs $40,000 to pay out two short-term loans and clear a tax debt. That sits comfortably inside the figure, which leaves a buffer for fees and a possible extension. The numbers in your own case will differ, but the method is the same.

Common mistakes when estimating equity

Owners usually err in the same few ways. The first is using the agent’s top-of-range price instead of a cautious valuation. The second is forgetting debts that are registered on the title but don’t feel like mortgages, such as an old line of credit, an offset facility with a limit or a second loan taken years ago. A title search shows everything registered, and it’s worth ordering one early. The third is ignoring costs: valuation fees, legal costs and establishment fees come out of what you receive or add to what you owe, so a loan sized exactly to the ceiling leaves no room. The fourth is assuming one lender’s limit applies to all. Limits differ, and a property one lender treats cautiously, such as a small unit or a rural block, may be well regarded by another.

What to bring to the first conversation

You don’t need much. The property address and who owns it, a rough idea of value, what’s owed and to whom, what you need and when, and how you expect to repay. If you have a recent loan statement or rates notice, that speeds up the first answer. If the property is in a trust, mention it at the start so the structure can be checked early. With those details, a lender can usually tell you within a day whether the equity is likely to be enough, which saves you from paying for a valuation that won’t change the answer.

Find your number

Put your property into our equity and LVR calculator, then tell us the details through our short enquiry form. There’s no credit check to enquire, no cash flow records are needed and a real person will give you an honest indication of what the property could support. Start your enquiry.