Quick answer
Loan to cost ratio (LTC) is the loan amount divided by the total cost of a project, shown as a percentage. Development and construction lenders use it to decide how much they'll fund and how much the developer must contribute. Total cost usually covers land, construction, professional fees, council charges, contingency and capitalised interest. Lenders test LTC alongside the loan to value ratio on the finished project, and lend the lower of the two.
Key points
- LTC = loan ÷ total development cost, expressed as a percentage
- Whatever the loan doesn't cover is the developer's equity
- Lenders also test the loan against the completed value; the tighter result wins
- Capitalised interest counts as a cost, so peak debt grows over the build
Loan to cost ratio, usually shortened to LTC, tells you how much of a project’s total cost the lender is paying for. Divide the loan by the full cost of delivering the project and multiply by 100: a $3m loan on a $4m project is 75 per cent LTC, and the developer funds the remaining 25 per cent.
Why do development lenders use it?
When you borrow against an existing building, a lender can value what’s already standing. A development hasn’t been built yet, so the lender wants to know two things: what the finished product should be worth, and how much it will cost to get there. LTC answers the second question and shows how much of the developer’s own money sits in front of the loan. If costs blow out or sales soften, that equity absorbs the first hit.
The Reserve Bank has noted that non-bank lenders to property developers generally ask for fewer pre-sales and allow greater leverage than banks, but charge considerably more. In practice, that shows up as a higher permitted LTC.
What counts as “cost”?
A typical total development cost budget includes:
- land purchase price, stamp duty and legal costs
- construction contract and variations allowance
- architect, engineer, planner and project manager fees
- council contributions, permits and utility connections
- contingency, often a set share of construction
- selling and marketing costs
- interest and lender fees over the life of the loan
That last line matters. Development facilities usually capitalise interest, so the balance grows as each progress draw is paid out. The lender has to fund the interest within the limit, which is why the facility is often noticeably larger than the build contract alone.
LTC or LVR: which one decides?
Lenders run both. The loan to value ratio here compares the loan with the gross realisation value, the expected sale proceeds of the completed project. Whichever test produces the smaller loan sets the limit.
Worked example. A developer in Geelong plans four townhouses.
| Item | Amount |
|---|---|
| Land | $1.2m |
| Construction | $2.3m |
| Fees, council, contingency, selling costs | $450k |
| Capitalised interest and lender fees | $250k |
| Total development cost | $4.2m |
| Expected sale value on completion | $5.6m |
Suppose the lender’s limits are 75 per cent LTC and 65 per cent of completed value. LTC allows $3.15m; the value test allows $3.64m. The LTC figure is lower, so the loan is $3.15m and the developer must contribute $1.05m, which could include the land if it’s already owned outright. To borrow more, the developer would need a lender with a higher LTC limit or a layer of mezzanine debt behind the senior loan.
Working through a feasibility and not sure the numbers stack up? Send us the outline and we’ll take a look.
What lifts or lowers your LTC?
Pre-sales, an experienced builder on a fixed-price contract, a strong track record and a modest project size tend to win more generous treatment. First-time developers, speculative projects with no pre-sales and regional markets with thin buyer depth usually see tighter limits. Our comparison of development finance and construction loans explains which structure fits which project.
Funding your next project?
Pinning down the equity contribution before you commit to a site avoids nasty surprises later. Our form needs roughly sixty seconds, and no credit enquiry is run when you send it. Your project isn’t circulated around the market; somebody on our team studies the feasibility summary and calls you about what’s achievable. Careful figures for land, construction and end value let us shortlist a funder whose LTC limit genuinely fits.
Frequently asked questions
What is a good loan to cost ratio?
From a borrower's view, a higher LTC means less of your own cash. From a lender's view, a lower LTC means more developer money at risk ahead of the loan. Bank development facilities tend to sit at the more conservative end; non-bank and private development lenders will often go higher, at a higher total cost.
What's the difference between LTC and LVR?
LTC compares the loan with what the project costs to deliver. LVR compares it with what the property is worth, usually the completed value for a development. A project with a healthy profit margin will show a lower LVR than LTC.
Does land I already own count towards my contribution?
Often yes. Many lenders credit unencumbered land as part of the developer's equity. Whether they use the original purchase price or the current value varies by lender, and it can make a big difference to how much cash you need.
Is interest included in total development cost?
Usually. Development loans commonly capitalise interest during the build, adding it to the balance, so lenders include the forecast interest in the cost budget. That means the facility limit has to cover it.
How can a developer close an LTC shortfall?
Options include bringing in a joint venture partner, using equity in other property as extra security, taking mezzanine finance that sits behind the senior lender, or reducing the project's cost.