Quick answer
Using your home as business security means that if the business loan can't be repaid, the lender can ultimately sell the house. The bigger traps are quieter: cross-securing that ties your home loan to the business debt, co-owners who must sign, a shortfall if a forced sale falls short, and a limit that leaves no room for the next problem. Know the worst case before you sign.
Key points
- A default on a loan secured by your home can end with a lender-controlled sale, even when the borrower is your company
- Cross-securing and all-monies clauses can link your home loan to the business debt, so read what the security actually covers
- A forced sale rarely achieves the price you would get on your own timetable, and any shortfall is still owed
- Co-owners and third-party security providers need independent advice, and banks signing up guarantors have extra steps to follow
- Borrowing less than your equity allows is the single cheapest way to cut the risk
Plenty of owners have put a house behind a business loan and never thought about it again, because the business did fine and the loan was repaid. The ones who write to lenders afterwards tend to describe the same thing: they understood the loan, but not what the security attached to it could do. This guide is about the second half.
None of this means you shouldn’t borrow against your home. Property is the cheapest security most owners have, and it is why a business loan against your home can be available when an unsecured loan isn’t. The point is to see the downside clearly first.
What are you actually agreeing to?
When you secure a business loan against your home, you sign a mortgage (or, for a caveat loan, a document that gives the lender a claim over the property). That gives the lender a legal right to sell the home, in a defined process, if the loan isn’t repaid.
Three things often get missed:
- The borrower and the security provider can be different people. A company borrows, and the director’s house secures it. The company’s limited liability doesn’t protect the house.
- The security can cover more than one debt. Many mortgage documents include clauses that make the property security for all amounts you owe that lender, not only the loan you are signing for today.
- Default doesn’t need a missed payment. Loan contracts list other triggers, such as breaching a covenant or failing to keep insurance in place. The Banking Code of Practice limits some triggers in small business loans from banks, but non-bank contracts vary, so it pays to read the default clause.
If you have not yet read a letter of offer in full, our guide to reading the fine print on a business loan is a good companion to this one.
How can cross-securing catch you out?
Imagine you own a home with an existing mortgage and you arrange a second mortgage for the business. Your first lender holds the first mortgage. The second lender holds a mortgage behind it. Nothing unusual yet.
Now imagine the business loan is with the same bank as your home loan, and the bank takes a mortgage over the same home as security for both. The two loans now sit on one set of security. If the business loan falls behind, the bank may be able to rely on the property for the combined debt. And if you later want to refinance the home loan to a better deal, the bank may not release the property until the business loan is cleared too.
That isn’t a reason to avoid your own bank. Banks are often the cheapest source of money, and keeping everything with one lender can be convenient. It is a reason to ask one direct question before you sign: “If I want to refinance one loan, what do I need to do to release the security from the other?” The answer tells you how tied together the two debts really are.
Our glossary entry on cross-collateralisation covers the idea in more detail.
What happens to co-owners and family?
If the home is owned jointly, every registered owner has to sign the mortgage. A spouse who isn’t involved in the business is then giving security for a debt that isn’t theirs. Lenders know this carries risk for them too, because a person who didn’t understand what they signed can later challenge it, so they usually ask for independent advice.
For bank loans covered by the Banking Code of Practice, the protections for guarantors are specific. Under the Code as published by the Australian Banking Association, a guarantee given for a small business loan must be limited to a stated amount or category, must carry a prominent notice that the guarantor should get independent legal and financial advice and can refuse to sign, and generally can’t be accepted until the third day after the guarantor receives the documents. The bank must also generally try to meet the guarantor without the borrower present unless the guarantor has had independent legal advice. And if the business defaults, the bank generally has to enforce the borrower’s own security before turning to a guarantor’s home.
Those protections come from the Code, and not every lender signs it. If you are in a non-bank deal, ask what the equivalent process is. Our guide to business loans and personal guarantees explains how guarantees differ from mortgages.
What if the sale doesn’t cover the debt?
A forced sale is nothing like a sale you plan. The lender, not you, controls the timing. It has to sell at a fair price, but it isn’t obliged to wait for the market to improve, and sale costs and any debts ranking ahead come out first.
Here’s an illustration, with round numbers chosen for ease:
| Item | Amount |
|---|---|
| Home value on your own timetable | $1,000,000 |
| Price achieved in a lender-run sale | $900,000 |
| First mortgage owed | $550,000 |
| Business loan secured behind it | $300,000 |
| Selling costs and accrued interest | $70,000 |
| Left over / (shortfall) | ($20,000) |
In that example the home sells for 10% below your estimate, and the debts and costs still exceed it by $20k. The borrower remains liable for that shortfall. A smaller loan, or a bigger gap between the value and the combined debt, would have turned the same sale into a surplus. This is the practical reason lenders cap borrowing at a share of value. Our guide to what LVR is and why lenders care goes into the mechanics.
How much of your equity should you use?
Lenders will tell you the maximum. The more useful question is how much the business needs, and how far below the maximum you can stay.
A rough sense check:
- Work out your usable equity using the steps in our guide to calculating usable equity, or the property equity calculator.
- Subtract the buffer. Keep a cushion for a lower valuation, capitalised interest and fees added to the loan, and the next unexpected bill.
- Borrow what the problem needs. A $120k gap doesn’t need a $300k facility because the limit allows it.
Want to see the numbers against a real property? Send us the details: it takes about a minute and doesn’t touch your credit file.
Are there ways to reduce the risk?
Yes, and most cost nothing:
- Prefer a short term with a documented exit. A loan you expect to repay from a sale, refinance or large invoice within months exposes the home for a shorter time than a loan with no end date. See our guide to exit strategies for short-term loans.
- Use a different property where you can. A rental or commercial property may suit the loan better than the family home, and the family isn’t living in it. Our comparison of home equity versus commercial property as security sets out the trade-offs.
- Keep the borrowing structure clean. One loan, one clear security, and a written release process.
- Check insurance and title details. Make sure the property is insured for the lender’s interest and that everyone on the title is named correctly.
- Test the repayments first. If the business can only repay by selling an asset, make sure that asset sale is realistic, and have a fallback.
If property isn’t the right security at all, read about business loans without property.
What if things start to go wrong?
Contact the lender early. Lenders generally respond better to a borrower who rings before a missed payment than to one who goes quiet. Banks that follow the Banking Code of Practice have commitments about financial difficulty support for small businesses, and the Small Business Debt Helpline on business.gov.au offers free counselling. Our guide to what happens if your business loan defaults walks through the stages.
Before you commit your home: a few questions worth asking us
Putting a home behind a business loan is a decision, not a formality, and most owners are better off having talked it through with someone who does this daily before they sign anything. Our enquiry takes about a minute, and asking what’s possible doesn’t involve a credit check, so your credit file stays as it is.
Your details aren’t passed around to a stack of lenders. A real person reads your situation, then rings you to discuss whether property security suits you, how much to use, and what else might do the job. The more accurately you fill in the form, including who owns the property and what’s already owed on it, the sooner the right option comes up.
Frequently asked questions
Can a lender take my home if my company is the borrower?
Yes, if you or another owner has signed a mortgage over the home as security for the company's debt. The company is the borrower, but the house is the lender's backstop. If the loan defaults and the lender follows its enforcement process, the home can be sold to repay the debt.
What does cross-securing mean?
It means one set of security backs more than one loan, or one loan is backed by several properties. A lender might hold your home as security for both your home loan and the business loan. If either goes wrong, the lender may have rights over the property for both, which makes it harder to refinance one without the other.
Does my spouse or partner have to agree?
Anyone who is a registered owner of the property has to sign the mortgage. A co-owner who is not the borrower is giving security for someone else's debt, and lenders will want that person to understand what they are signing and often to take independent legal advice.
What happens if the house sells for less than the debt?
The borrower is still liable for the shortfall after sale costs and the debts ahead of the lender are paid. That is why lenders look at a conservative valuation and why leaving a buffer between the loan and the property value matters.
Is there a safer way to borrow against property for a business?
Using a smaller share of your equity, choosing a short term with a clear exit, or securing against an investment or commercial property instead of the family home all reduce the exposure. Unsecured or asset-secured options can also work for smaller amounts.
Should I talk to an accountant or lawyer first?
For anything that puts the family home on the line, yes. A lawyer can explain exactly what the mortgage covers and an accountant can test whether the business can carry the repayments. Neither costs much compared with the size of the decision.