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The general rules on leverage are in what LVR can I borrow. This page works one example through from start to finish, because the gap between the headline figure and the cash that lands in the account surprises people.
The scenario
A company owns an industrial unit in a capital city.
- Valuation: $2,500,000
- Bank first mortgage: balance $1,020,000, limit $1,100,000
- Need: clear a $380,000 ATO debt and fund $250,000 of stock
- Term: 12 months, exit by refinance once the tax debt is cleared and the next year’s financials are lodged
Step 1: the ceiling
$2,500,000 x 75% = $1,875,000 total debt allowed.
Step 2: subtract the first mortgage
The bank facility can be redrawn to $1,100,000, so the lender uses the limit.
$1,875,000 less $1,100,000 = $775,000 gross second mortgage.
Step 3: fees
- Establishment fee at 2%: $15,500
- Lender legals, valuation, bank consent and deed of priority: say $9,500
Step 4: interest
At 0.975% a month, interest on $775,000 is about $7,556 a month, or $90,675 for the year.
- If paid monthly, nothing is deducted upfront, and the company must find $7,556 a month.
- If fully capitalised, $90,675 is held back or added within the limit, so it comes out of the $775,000.
Step 5: net funds
| Interest paid monthly | Interest capitalised | |
|---|---|---|
| Gross loan | $775,000 | $775,000 |
| Fees and costs | $25,000 | $25,000 |
| Interest held | $0 | $90,675 |
| Net to borrower | $750,000 | $659,325 |
The need was $630,000. Both structures cover it, with more buffer if interest is paid monthly.
What changes the answer
- A valuation of $2,300,000 instead of $2,500,000 cuts the gross loan by $150,000.
- A lender that caps this asset at 70% cuts it by $125,000.
- A deed of priority capping the bank at its current balance plus a margin can add back some of the unused limit.
- Adding a second property as security lifts the ceiling.
The exit test
Borrowing capacity is not approval. The lender will ask what repays $775,000 in 12 months. Here the answer is a refinance of $1,875,000 into one commercial facility at 75%, which is achievable for a profitable business with clean tax lodgements. If that refinance would not stack up, the right loan is smaller.
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Get matched with a funderFAQ
Do lenders use my valuation or theirs?
Theirs. The figure comes from a valuer on the lender's panel, and it can be lower than an agent's appraisal.
Is the first mortgage counted at its balance or its limit?
At its limit if you can redraw, because you could draw it back up. A deed of priority that caps the first mortgagee's priority amount fixes the figure.
Can interest be added to the loan?
Yes. Capitalised interest is included in the LVR calculation, so it reduces the cash available on day one.