Definition
Loan-to-value ratio, or LVR, is the total amount lent against a property divided by the property's value, shown as a percentage. A $300,000 loan against a $1,000,000 property is a 30 per cent LVR. Lenders use LVR to measure their safety margin, so it shapes how much you can borrow and which products are available.
LVR is the first number a property-secured lender works out, because it shows how much of a cushion sits between the loan and the property’s value. If the property ever had to be sold, a low LVR means the debt would almost certainly be repaid in full; a high LVR leaves less margin for a falling market, selling costs and interest that builds up.
Why it matters for business borrowers
For a business loan secured by a home or commercial building, the LVR shapes three things: how much you can borrow, which type of facility is on offer and how much scrutiny the application gets. A business owner with modest debt on a well-located property usually has more options than one whose property is already heavily mortgaged, even if the businesses themselves look similar.
Total equity is not usable equity
Owners often think in terms of total equity, which is the value minus the debt. Lenders think in terms of how far they will go. If a lender’s limit is 70 per cent, a $1,000,000 property with $400,000 owing has $600,000 of equity but only $300,000 of borrowing headroom (illustrative figures). Run your own numbers in the LVR and equity calculator before you make an enquiry.
Common questions
How do I calculate LVR?
Total the existing and proposed debts on that property, divide by its valuation, then express the answer as a percentage. Our property LVR and equity calculator does this for you and shows your usable equity.
Does a second mortgage change the LVR?
Yes. Lenders look at the combined LVR of all loans secured on the property, so a second mortgage adds to the first when working out the ratio.
Sources and further reading
Related terms