Commercial second mortgage: how much can you borrow behind the bank's first mortgage?

If you own a warehouse, shop, office or factory with a bank loan on it, the question isn’t whether there’s equity. It’s how much of that equity a second lender will actually count. The answer is one line of arithmetic, and two inputs in it, the valuation and the first mortgage, matter far more than most owners expect.

How much can you borrow on a commercial second mortgage?

The formula is the same as for a house, with a lower ceiling:

Second mortgage = valuation × combined LVR − first mortgage limit

“Combined LVR” counts every loan secured on the property, the bank’s and the new one, against the valuation. Use these as planning bands, not lender policy:

	Comfortable	Workable	Stretch
Commercial combined LVR	up to 55%	55% to 65%	65% to 70%
Residential combined LVR	up to 65%	65% to 75%	75% to 80%

Commercial sits about ten points lower at each step. The reason is liquidity. A second lender is paid only after the first, so it has to be confident the building would still cover both loans after a slow sale and selling costs. Our combined LVR explainer covers the buffer logic in full.

One more point on the “first mortgage” input: use the limit, not today’s balance, if the bank loan is a line of credit or has redraw. A lender will usually count what could be drawn. Reading your loan statement shows where the limit sits.

A worked example (illustrative)

Take a leased industrial unit that a valuer puts at $2,000,000, with a bank first mortgage limit of $900,000. Everything is round on purpose.

Combined LVR	Total secured debt allowed	Second mortgage
55%	$1,100,000	$200,000
65%	$1,300,000	$400,000
70%	$1,400,000	$500,000

The comfortable figure is $200,000 and the stretch figure is $500,000. Most owners should plan around the lower half of that range, because the next section shows how easily the valuation moves.

Why does the valuation swing so much on commercial property?

Because there are two valuation bases, and the cap rate can move.

Leased property is valued on income. The valuer takes net operating income (rent less the outgoings the owner pays, such as rates, insurance and land tax) and divides it by a capitalisation rate taken from comparable sales. PropertyNow’s explainer sets out the formula: value equals net operating income divided by the cap rate, and “a lower cap rate produces a higher value”.

Say the unit above earns $120,000 net:

Cap rate	Value	Combined LVR 55% less $900,000 first mortgage
6.0%	$2,000,000	$200,000
7.0%	about $1,714,000	about $43,000
5.5%	about $2,182,000	about $300,000

A one-point move in the cap rate cut the value by about 14% and cut the available second mortgage by roughly three quarters at the comfortable band. That is gearing at work: the first mortgage is fixed, so every dollar of lost value comes out of the second lender’s slice. It is why the value you quote and the value the lender’s valuer adopts can be a long way apart.

Vacant or owner-occupied property is valued on sales. With no market rent being paid, there’s no income to capitalise, so valuers lean on direct comparison: recent sale prices of similar buildings, adjusted for differences. PropertyNow notes that an investor buyer needs an allowance for the time and cost of leasing the space, while an owner-occupier buyer cares about layout, access and zoning. If your business occupies the building through a related entity, expect the lender to look through that lease, because rent you pay yourself isn’t independent income. The valuations page explains what’s usually ordered.

The practical takeaway: before you plan around a number, work out which basis will apply and run it at a valuation 10% below your estimate.

What does the first mortgagee need to agree to?

Your bank’s facility or mortgage terms commonly say that you can’t grant further security over the property without written consent. A second mortgage registers behind the first, but without that consent it may breach the bank’s contract. Commercial facilities add covenants that residential loans seldom have: loan-to-value tests, interest cover, and sometimes an assignment of rents.

So the sequence matters:

1. Find the clause in your bank documents that deals with further security.
2. If consent is needed, ask in writing, naming the second lender and the maximum amount.
3. Get the consent letter before settlement, not on settlement day.

The full process is in the first mortgagee consent guide, and a missing or conditional consent is the most common reason a commercial second mortgage runs late.

What else gets checked on a commercial property?

• The lease. Term remaining, rent review, tenant covenant strength, and whether the tenant is arm’s-length. Our commercial property page walks through each.
• The title. Easements, old mortgages and caveats. Order a title search first so there are no surprises.
• Who owns it. Many commercial buildings sit in a trust or company, and the trustee or directors have to sign. See trust or company-owned property. Property held in an SMSF generally can’t be offered as security for a business loan.
• Zoning and use. Specialised buildings, such as childcare centres or service stations, narrow the buyer pool and usually mean a lower band.
• Registration costs. Lodgement fees come off the top. What every state charges lays them out.

Is the market a reason for lenders to tighten?

Conditions are uneven. The Reserve Bank’s October 2026 Financial Stability Review says most businesses “should be able to manage elevated cost pressures, although conditions are more challenging in some sectors.” For a second-ranking lender the consequence is simple. Where a sector is under strain, the valuer is more likely to adopt a higher cap rate or a vacancy allowance, and the lender is more likely to sit at the lower bands. A well-leased industrial unit and a half-empty suburban office are treated very differently, even at the same price per square metre.

When is a commercial second mortgage the right tool?

It tends to fit when:

• the bank loan is cheap to keep or costly to break, and you only need a defined amount;
• the need is for a business purpose with a clear way out, such as a contract payment, stock, a tax bill or a short-term debt clean-up;
• you’d rather not reopen the bank’s whole credit assessment on the property.

It fits less well when the debt would sit above the stretch band, when the building is specialised or heavily vacant, or when there’s no realistic exit within the term. The exit plans page sets out the options, and the equity and LVR calculator lets you test the figures at different valuations before you speak to anyone.

If you’d like a second pair of eyes on your numbers, you can check your options here.

What is a sensible way to prepare?

1. Get your first mortgage limit and balance from your latest statement, and the clause covering further security.
2. Collect the lease or leases, with rent schedule and outgoings.
3. Estimate the value on both bases where it’s possible: income and comparable sales.
4. Run the calculator at three valuations: your estimate, 10% below, 10% above.
5. Decide the smallest amount that does the job. A smaller loan sits in a safer band and settles faster.
6. Name the purpose and the exit in a sentence each.

Where does your own building stand?

A commercial building can look like a lot of equity on paper and still support a modest second mortgage once the band, the valuation basis and the first mortgage are applied. The reverse also happens, because a strong lease and a modest bank loan can surprise owners the other way. The only way to know is to run your numbers.

A short enquiry takes about 60 seconds, and it won’t touch your credit file, because there’s no credit check when you first enquire. Your details don’t go out to a pile of lenders. They go to one specialist, and a real person looks at your property, your lease and your first mortgage before calling you. Please fill the form in accurately, with the property type, estimated value, what’s owed to the bank, the amount you want and who owns the title, so the first structure we discuss is the one that settles.

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