Home equity business loans: using the equity in your home to fund your business

For many Australian business owners, the biggest asset they have isn’t in the business at all. It’s the house. A home equity business loan uses the value you’ve built up in that home as security for money that goes to work in your business, whether that’s buying equipment, paying out tax debt, funding stock or buying out a partner. Because the lender has the comfort of property security, you can usually borrow more, over a longer term and with fewer questions about turnover than an unsecured loan would allow.

What is home equity, and how much of it can you use?

Equity is what your home is worth minus everything owed against it. A home worth $1.2m with a $500k mortgage has $700k of equity on paper. You can’t borrow all of it, because lenders leave a buffer between total debt and value in case prices move or the property has to be sold. How big that buffer is depends on the lender, the location, the type of home and whether the new loan sits first or second in line.

The quickest way to get a feel for usable equity is to start with a realistic value (recent sales of similar homes nearby, not the best one on the street), subtract what you owe, and then assume a lender will lend against part, not all, of what’s left.

What are the ways to borrow against your home for business?

There are three main structures, and each suits a different situation:

Structure	How it works	Best when
Top-up or increase with your current lender	Your existing home loan is increased and the extra goes to the business	Your bank is supportive and you’re not in a hurry
Second mortgage	A separate business loan is registered behind your existing home loan	You want to leave your home loan alone or need a faster decision
Caveat loan	The lender lodges a caveat on the title to protect its interest, rather than registering a mortgage	The need is short-term and urgent

A private mortgage can sit in either first or second position, and a caveat loan is a short-term tool with its own rules. If you’re still working out whether you need security at all, the secured or unsecured check is a useful first stop.

Why use home equity rather than an unsecured business loan?

Unsecured business loans, typically $5k to $500k sized on turnover and bank statements, are excellent for trading businesses with steady deposits. But they have limits:

• Size. The amount is tied to turnover, so a business with modest deposits can only borrow so much.
• Term. Unsecured loans tend to be shorter, which means higher regular repayments.
• Track record. New businesses, or those with patchy statements, may not qualify at all.

Home equity changes the picture. With property security from $20k to $5m, the amount is driven mainly by the home’s value, not just the business’s bank statements. That’s why it’s often the answer for bigger one-off needs, such as buying a business or clearing ATO tax debt, and for newer businesses without a long trading history.

If your home has equity and your business has a plan for it, you can see what you could unlock in about a minute.

What do lenders look at?

• The property: value, location, type and condition. A standard suburban house is the simplest security there is.
• Existing debt: your current home loan balance, any arrears, and whether the first lender will consent to a second mortgage.
• Every owner on title: all registered owners must sign, and non-borrowing owners are usually asked to get independent legal advice.
• The purpose: what the money is for and that it’s genuinely for business use.
• The exit: for short-term loans, how the loan will be repaid (a refinance, sale, or business cash flow); for longer loans, whether repayments are affordable.
• Credit and tax history: considered case by case, not an automatic barrier.

What does it cost, and what else should you think about?

Pricing is set on your individual situation: the home’s value and location, how much you’re borrowing against it, whether the loan sits first or second, the term and your credit history. A second mortgage generally reflects that the lender sits behind the first, and short-term private loans are priced for their speed and flexibility.

The cost structure typically includes an establishment fee, interest (paid monthly, or prepaid or capitalised on shorter facilities), the lender’s legal costs, a fee to register the mortgage and, later, discharge costs. If you refinance your existing home loan to free up equity, Moneysmart’s guide to switching home loans lists the costs to compare, including break fees on fixed-rate loans, discharge fees and application fees. Those costs are one reason many owners prefer to leave a good home loan alone and add a separate second mortgage.

Keep the business borrowing separate. The ATO’s guidance on interest deductions is built around the purpose of the borrowed money, and where one loan account is used for both private and income-producing purposes, the ATO says you must apportion the interest and keep accurate records. Running business money through a separate loan account, rather than redrawing it from your home loan, makes that far simpler. Your accountant can tell you how it applies to your structure.

Illustrative example: clearing a tax debt without touching the home loan

Illustrative example: a plumbing business has built up $160k of ATO debt after two hard years and a large client going into administration. The owner’s home is worth about $1.1m with $450k owing to a major bank on a fixed rate that still has two years to run. Breaking the fixed loan to refinance would trigger break costs, and the bank isn’t keen on increasing the loan for business tax debt.

Instead, the owner takes a second mortgage of $180k behind the bank’s loan, with the first lender’s consent. The ATO debt is paid out in full, the extra covers a cash buffer, and the home loan carries on unchanged. Once the fixed term ends and the business has a year of clean BAS lodgements behind it, the owner refinances both loans into one.

When shouldn’t you use your home?

Home equity is powerful, which is exactly why it deserves respect. It’s the wrong choice when:

• The business problem is ongoing losses rather than a one-off need. Borrowing against the house won’t fix a business that’s losing money every month.
• There’s no clear way to repay a short-term loan when it ends.
• Not everyone on the title is genuinely comfortable with the risk.
• An unsecured business loan would comfortably do the job.

Ready to see what your home’s equity could do for your business?

If you’ve got equity in your home and a clear purpose for it in the business, finding out where you stand is quick. The enquiry takes about 60 seconds and there’s no credit check just for enquiring. We don’t pass your details around a crowd of lenders, so you won’t be flooded with calls. A real person looks at your home, your existing loan and what you need the money for, then rings you to talk it through. Please fill in the form accurately, especially your home’s rough value and what’s owing on it, so the first option we put to you is the right one.

See if your home equity qualifies →