Second mortgage business loans to $500,000

for any business purpose

If your bank has said no to additional business lending, but you have equity in residential or commercial property, a second mortgage may provide another option.

A second mortgage allows another lender to provide business finance secured against your property while your existing first mortgage remains in place.

These are generally short-term loans designed to solve a particular funding requirement or give a business time to improve its position. Depending on the lender, repayments may be structured as interest-only or the interest may be capitalised for an agreed period, reducing or even eliminating loan repayments during that time.

We work with a range of second-tier lenders with different lending criteria, property requirements and repayment options. We can look at your property position, your business and what you're trying to achieve before identifying lenders that may be suitable.

What is a second mortgage?

A second mortgage is a loan secured against property that already has a mortgage registered against it.

Your existing lender — often your bank — retains its first-ranking mortgage. The new lender registers a second mortgage behind it.

If the property ever had to be sold to repay the lending, the first mortgage lender would be repaid before the second mortgage lender.

That additional risk is one reason second mortgage lenders generally charge more than banks. However, they can also have more flexible lending criteria and may consider applications a bank isn't prepared to approve.

Why use a second mortgage for business finance?

One of the most common reasons is straightforward:

Your bank has said no.

That doesn't necessarily mean the business has no viable funding options.

Banks operate within their own lending policies and risk appetite. A second-tier lender may be prepared to consider the equity available in your property alongside the business's circumstances, the purpose of the loan and how you expect to repay it.

A second mortgage can potentially provide funding for:

• Working capital

• GST, PAYE or other tax obligations

• Stock or materials

• Business growth

• Opening a new location

• Repairs or maintenance

• Buying another business

• Managing a seasonal or temporary cashflow shortage

• Refinancing other business debt

• Other legitimate business purposes

The important question isn't simply why you need the money. It's also what the funding will allow the business to achieve and how the loan will ultimately be repaid.

A second mortgage can provide breathing space

Sometimes a business doesn't need a permanent source of expensive finance.

It needs time.

A growing business may be spending money now to generate revenue that won't arrive for several months. A seasonal business may need to get through its quiet period. Another business may have had a difficult year but now has a credible plan for improving cashflow and profitability.

The bank may not be prepared to lend based on the business's position today.

A second-tier lender may be.

The second mortgage can then provide a period in which the business can implement its plans, improve cashflow, reduce other debt or demonstrate stronger financial performance.

At the end of the loan term, the goal may be to return to the bank with a healthier business and refinance the second mortgage into lower-cost bank funding.

That exit strategy is an important part of short-term second mortgage lending.

What does capitalising interest mean?

Capitalised interest can be particularly useful when the purpose of the loan is to give a business breathing space.

Normally, you make regular repayments after taking out a loan.

With capitalised interest, some or all of the interest that would otherwise be paid during an agreed period is instead added to the loan balance.

Depending on the lender and loan structure, this can mean making no regular loan payments during the capitalisation period.

For example, if interest is capitalised for the first six months, the interest and applicable fees that would otherwise have been paid during those six months are added to the amount owing.

You therefore owe more at the end of the capitalisation period than you originally borrowed.

Why would a business capitalise interest?

Because sometimes preserving cash today is more important than minimising the loan balance.

Capitalised interest can allow a business to put available cash towards things such as:

• Wages

• Stock and materials

• Marketing

• Repairs and maintenance

• Opening a new location

• Implementing a growth plan

• Getting through a seasonal low period

• Catching up on other obligations

Rather than taking out a loan and immediately adding another significant monthly repayment to the business's expenses, capitalisation can provide time for the purpose of the borrowing to start producing results.

It isn't free money. The interest is still being charged and the loan balance increases.

But when it's used as part of a clear plan, the reduction in immediate cash outgoings can make a meaningful difference to a growing or recovering business.

What is an interest-only second mortgage?

Interest-only is another way of reducing repayments during the loan term.

Instead of repaying both principal and interest each month, you pay the interest while the original loan amount remains outstanding.

The principal is then repaid at the end of the loan term, usually through the agreed exit strategy.

For a business trying to improve its cash position, interest-only repayments can be considerably lower than principal-and-interest repayments.

Depending on the lender and application, your repayment options might therefore include:

• Principal and interest

• Interest-only

• Partially capitalised interest

• Fully capitalised interest for an agreed period

Not every lender offers every option, and the appropriate structure depends on your circumstances and how the loan will ultimately be repaid.

What is an exit strategy?

Because second mortgages are generally short-term lending, the lender will want to understand how you expect to repay the loan at the end of the term.

This is often called the exit strategy.

For a business loan, one possible exit is refinancing.

For example, a business might use a 12-month second mortgage to resolve an immediate cashflow problem and improve its financial position. Over that year, it may increase revenue, improve profitability, clear tax arrears or build a stronger financial track record.

It can then approach its bank again from a much stronger position.

If the bank is satisfied with the improved financial performance, it may agree to refinance the second mortgage, moving the business back to lower-cost bank funding.

Other exit strategies can include the sale of an asset or property, receipt of expected business proceeds, or another clearly identifiable source of repayment.

A credible exit strategy is important. A second mortgage should solve a funding problem, not simply postpone one.

How much can I borrow with a second mortgage?

This varies significantly between lenders.

The starting point is usually the equity available in the property.

The lender will look at the property's value, the amount already owing to the first mortgage lender and the total lending that would be secured against the property after the second mortgage is added.

This is expressed as the loan-to-value ratio (LVR).

For example, if a property is worth $1 million and the existing mortgage is $600,000, there is $400,000 of equity before allowing for the second mortgage.

That doesn't mean you can necessarily borrow the full $400,000.

Each lender has its own maximum LVR and lending criteria. Some lenders are prepared to consider higher combined LVRs than others, particularly where the overall application and exit strategy are strong.

We work with lenders with different LVR limits, so the amount available will depend on both the property and the lender.

What property can I use for a second mortgage?

Depending on the lender, security may include:

• Your owner-occupied home

• An investment property

• Commercial property

• Property owned by the business

• Property owned by shareholders or other associated parties

Different lenders have different appetites for property types and locations. Most will not secure against lifestyle or rural property.

Residential property in a major centre may be treated differently from commercial, rural or specialised property, for example.

If the property is jointly owned, the other owners will need to agree to it being used as security and will be required to sign the relevant documentation. If the property is owned by a trust, the trustees will also need to sign relevant documentation.

What information will I need to provide?

This depends on the lender and application.

Some second mortgage lenders place greater emphasis on the property security and available equity, while others undertake a more detailed assessment of the business's ability to service the loan.

You may be asked to provide:

• Details of the property being offered as security

• Confirmation that the council rates are paid to the current date

• Evidence of its value (sometimes an independent valuation is required, but not always)

• Details of the existing first mortgage - balance and recent payments

• Business bank statements

• Financial statements

• Management accounts

• Information about existing business debt

• Your position with the IRD

• Details of why the funds are required

• Evidence supporting your proposed exit strategy

One of the advantages of using a broker is that we can identify lenders whose assessment approach is appropriate for your circumstances.

Can I get a second mortgage if my bank has declined my business loan?

Potentially, yes.

In fact, this is one of the situations in which businesses commonly look at second-tier lending.

A bank decline doesn't mean another lender will automatically approve the application. However, second-tier lenders have different lending criteria and risk appetites.

They may be prepared to consider factors that don't fit comfortably within a bank's lending policy, particularly where there is strong property equity and a credible plan for repaying the loan.

The aim may then be to use the second mortgage strategically, improve the business's position and ultimately return to bank funding.

Is a second mortgage more expensive than bank lending?

Generally, yes.

Second mortgage lenders take greater risk because the first mortgage lender has priority over the property. Non-bank lenders may also be prepared to approve applications that fall outside normal bank lending criteria.

That additional risk is reflected in the cost of borrowing.

For that reason, we generally view a second mortgage as short-term strategic funding, rather than expensive lending that a business should simply leave in place indefinitely.

The total cost also matters more than the interest rate alone. Depending on the lender, there may be establishment, legal, valuation and other fees.

Understanding the proposed term and exit strategy is therefore particularly important.

What are the risks of using a second mortgage for business finance?

A second mortgage is secured against property.

If the loan isn't repaid and the lender ultimately has to enforce its security, the property can be at risk.

Capitalising interest also means the amount owing increases during the capitalisation period, while an interest-only loan leaves the original principal to be repaid at the end.

Those features can be extremely useful when they're part of a well-considered funding strategy, but they need to be understood before entering into the loan.

You should understand the interest rate, fees, repayment structure, security and consequences of default, and obtain independent legal or financial advice where appropriate.

We always recommend getting legal advice before entering into a second mortgage agreement.

Why use a broker for a second mortgage?

Second mortgage lending varies considerably between lenders.

Different lenders have different:

• Maximum LVRs

• Loan amounts

• Property preferences

• Geographic restrictions

• Business assessment requirements

• Interest rates and fees

• Interest-only options

• Capitalised-interest options

• Loan terms

• Exit-strategy requirements

The lender offering the highest LVR isn't necessarily the best lender for your circumstances.

We can look at your property equity, existing mortgage, business position, reason for borrowing and intended exit before identifying lenders whose criteria may fit.

We can also help you understand the differences between offers and what each structure means for your business's cashflow.

 FAQs about second mortgages for business