Loan-to-value ratio (LVR)

If there’s one number that shapes a property-secured business loan, it’s the loan-to-value ratio. It tells the lender how much cushion sits between the debt and the property’s worth, and that cushion is what protects both of you if the exit takes longer than planned.

How is LVR calculated?

ASIC’s Moneysmart defines LVR as the amount of a loan measured against the value of the asset, worked out by dividing the loan amount by the value. Moneysmart describes security as an asset put up to guarantee a loan, which the lender can sell if the loan isn’t repaid. Put those together and you have the logic of secured lending: the lower the LVR, the more comfortably a sale would clear the debt.

In private secured business lending the calculation is the same, with two refinements:

• All secured debt counts. The existing bank mortgage, any other caveat or mortgage, and the new loan.
• The end-of-term balance counts. If interest will be capitalised, the debt grows, so the LVR at maturity matters as much as the LVR at settlement.

What goes on each side of the calculation?

Structure	Debt side	Value side
Private first mortgage over a clear title	The new loan, plus any capitalised interest by maturity	The property’s assessed value
Refinance of a bank first mortgage	The new loan that pays the bank out, plus costs	The property’s assessed value
Second mortgage	The first mortgage balance (or limit) plus the new loan	The property’s assessed value
Caveat loan	Everything already registered, plus the new loan	The property’s assessed value
Two or more properties	All debt secured on every title	The combined assessed value

Note the second-mortgage row. If the first loan is a line of credit, a careful lender uses the limit, not today’s drawn balance, unless a deed of priority caps it.

How is the value side of the LVR assessed?

With no formal valuation required, the lender looks at the property directly: its location, type, condition, title, recent comparable sales and how readily it would sell. That saves days of waiting and the cost of a report, and avoids the conservative figure a formal report can produce. Our page on how property is assessed directly explains the process.

Be realistic with your own estimate. An owner’s figure often leans on the best sale in the street or a listing price that never sold. A lender will look at what comparable properties actually settled for, and at how long they took to sell. Starting from a sober number means the equity you plan around is equity that will still be there when the assessment comes back.

Why does LVR matter to a borrower?

It decides three things: whether a loan is possible, how much you can borrow, and the price. The acceptable LVR isn’t a single fixed number. It moves with the property type (a suburban home sells more readily than a specialised factory), the location, whether the loan ranks first or second, the length of the term and the strength of the exit.

It’s also why two owners with similar properties can receive different answers. A modest LVR on a hard-to-sell property in a thin market may carry more risk than a slightly higher one on a home in a busy suburb with plenty of recent sales.

It also decides how much breathing room you have. A loan that starts comfortably but drifts upward through capitalised interest, and then meets a delayed sale, can end up tight. Leave headroom.

Illustrative example: a Melbourne logistics owner has a warehouse worth around $2m with $900k owing to the bank, and wants a $300k second mortgage for 12 months with interest capitalised. At settlement, total secured debt is $1.2m, an LVR of 60%. If capitalised interest adds roughly $40k by maturity (an illustrative figure, not a quote), the end-of-term LVR is about 62%. The lender tests the loan on the second figure.

Which related terms should I know?

• How much equity can I use?: the full explanation of usable equity.
• First mortgagee: whose debt sits first in a second-mortgage LVR.
• Using multiple properties as security: spreading the debt across titles.
• Secured borrowing power calculator: run your own numbers.

All other definitions are in the secured lending glossary. Got a figure in mind? Ask whether your equity supports it.

Want a straight answer on your equity?

Send us the property, a fair estimate of its worth and everything already owing against it. There’s no credit check to enquire, your details are seen by one direct lender rather than a crowd of them, and a real specialist reviews each enquiry. The closer your figures are to reality, the more useful the answer you get back on the first call. Check if you qualify.