Quick answer
LVR, or loan-to-value ratio, is the total lending secured against a property divided by its value. For property-secured business loans, lenders set a maximum LVR that depends on the property type, location, loan position (first or second mortgage), the borrower and the loan's purpose and term. The lower your LVR, the more options you generally have. Usable equity is what remains below the maximum.
Key points
- LVR = total secured lending ÷ property value.
- Second mortgages and caveats are assessed on combined LVR.
- Property type and location strongly affect maximum LVR.
- Usable equity is usually much less than total equity.
Checklist
- Realistic property value
- All existing secured loans listed
- Combined LVR calculated
- Maximum LVR for this property type checked
- Usable equity worked out
Whenever property secures a business loan, one number shapes almost everything else: the loan-to-value ratio. It decides how much you can borrow, which products are available and how closely the rest of your application is examined. Understanding it lets you estimate your options before you speak to a lender and avoid asking for amounts that are out of reach.
How LVR is calculated
LVR = total lending secured on the property ÷ property value × 100.
Illustratively, a property valued at $900,000 with $360,000 owing has an LVR of 40 per cent. Add a $180,000 business loan secured on the same property and the combined LVR becomes 60 per cent. The property LVR and equity calculator does this for you.
Combined LVR for second mortgages and caveats
When a business loan sits behind an existing mortgage, as with a second mortgage or caveat loan, lenders look at the combined LVR of all loans on the property. The second lender cares about the total, because it is repaid only after the first.
What moves a lender’s maximum LVR
| Factor | Effect |
|---|---|
| Property type | Standard houses usually allow higher LVRs than units, rural, vacant or specialised property |
| Location | Metro and major regional areas usually allow more than remote areas |
| Loan position | First mortgages usually allow more than second mortgages or caveats |
| Term and interest | Capitalised interest increases the balance over time |
| Borrower profile | Credit and trading history can affect limits |
| Exit plan | Strong, near-term exits support short-term lending |
Usable equity versus total equity
Total equity is value minus debt. Usable equity is the lender’s maximum LVR applied to the value, minus existing debt. If a lender’s maximum is 70 per cent on a $900,000 property with $360,000 owing, usable equity is $270,000, even though total equity is $540,000 (illustrative figures). Owners frequently overestimate what they can borrow by thinking in total equity.
Valuations
Every lender needs a value for the property before it can work out the LVR. Depending on the lender, the loan size and the property, that might be a formal valuation, a desktop or automated estimate, a recent contract of sale or an internal assessment. Values can differ from what owners expect, especially in changing markets. Use a conservative estimate when planning.
Improving your LVR
- Borrow less by contributing cash or funding part of the need another way.
- Pay down existing loans before applying.
- Add security, such as a second property, to spread the loan.
- Choose monthly interest rather than capitalised interest on short-term loans.
- Wait if the property’s value is likely to be supported by recent sales.
LVR and the rest of your application
A low LVR does not guarantee approval; lenders still consider the purpose, exit and borrower. But it does broaden options. A high LVR narrows them and may shift the conversation to shorter terms, higher pricing or additional security.
Commercial property
Commercial and specialised properties are assessed more conservatively, and their value depends heavily on use and income. Our guide to commercial versus residential security explains the differences.
An illustrative example
A made-up building company wants a short-term loan secured on the director’s home and an investment unit. Using the home alone would push the combined LVR above the lender’s limit. Adding the unit as security spreads the loan across both properties, bringing each within limits and allowing the loan to proceed.
LVR over the life of a loan
LVR is not fixed. As you repay, the balance falls and the LVR improves. If interest is capitalised, the balance rises and the LVR worsens. Property values also move. For longer facilities, lenders may revalue at reviews, and a fall in value can push the LVR above a covenant even if every repayment has been made. Keep an eye on the market and your balance, and talk to your lender early if a review might be a problem.
Multiple properties as security
When more than one property secures a loan, lenders may assess the LVR across the whole security pool. That can help when one property has little equity, but it also ties several properties to the same debt. Ask whether a property can be released once the balance falls, so it is not tied up longer than necessary.
Questions to ask about LVR
- What maximum LVR applies to this property type and location?
- How will the property be valued, and who pays?
- Is the LVR calculated on the first mortgage alone or combined?
- What happens if the value falls during the loan?
- Can security be released as the loan is paid down?
Why a buffer below the maximum helps
Borrowing right up to a lender’s maximum leaves no room for a valuation that comes in lower than expected, for capitalised interest, or for a market dip. A buffer of even a few percentage points can keep a loan on track and avoid last-minute restructuring before settlement.
Want to know what your property could support?
If you are thinking about property-secured business finance, make one enquiry. There is no credit check when you first enquire, a real person reviews it and your details go to one lending partner rather than a list. Include the property’s suburb, type, an honest value and what is owed in your enquiry.
Frequently asked questions
What is a good LVR for a business loan?
Lower is better from a lender's perspective. Each lender sets its own maximum depending on the property and loan type, so there is no single good figure. Leaving a buffer below the maximum is sensible.
How is the property value determined?
Lenders may use a formal valuation, a desktop estimate, a recent contract of sale or their own assessment, depending on the lender and loan size.
Does commercial property have a lower maximum LVR?
Often yes. Commercial and specialised property usually has more conservative LVR limits than standard residential property.
What is combined LVR?
The total of all loans secured on a property, including first and second mortgages and caveat loans, divided by the property's value.
Can I improve my LVR?
You can borrow less, pay down existing loans, add another property as security or wait for the property's value to rise.
Does capitalised interest affect LVR?
Yes. If interest is added to the loan, the balance grows, increasing the LVR over the term. Lenders factor this in for short-term loans.
Do lenders count my home loan offset balance?
Generally LVR is calculated on the loan balance or limit secured on the property. How offset balances are treated varies by lender, so ask.
Sources and further reading
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