Quick answer
Loan-to-value ratio (LVR) is the total debt secured against a property divided by the property's value, shown as a percentage. A $450k loan against a $600k property is a 75% LVR. Business lenders set a maximum LVR for each kind of security, measure it against their own valuation, and count every loan already on the title, so the LVR largely decides how much property-backed money you can raise.
Key points
- Formula: all debt secured on the property ÷ the lender's valuation × 100
- Each lender sets a ceiling by property type; homes usually allow more than vacant land or specialised buildings
- Second-ranking loans are measured on combined LVR, which includes the first mortgage
- A low valuation shrinks your headroom faster than most owners expect
Put simply, loan-to-value ratio is a measure of how much of a property is already spoken for by debt. Divide what’s owed against the property by what it’s worth, and the answer, expressed as a percentage, is the LVR. Moneysmart uses the example of a $450,000 loan on a $600,000 home, which works out at 75%.
Why business lenders care so much about LVR
When a loan is secured on real estate, the lender’s real question is “if this goes wrong, can we sell the property and get our money back, with room to spare for costs and a soft market?” LVR answers that in one number. The gap between the debt and the value is the lender’s cushion.
That’s why every property-backed lender works to a maximum LVR, and why the maximum moves with the type of security. A suburban house in a capital city sells quickly to a deep pool of buyers, so it supports a higher ceiling. Farmland, a specialised building such as a purpose-fitted childcare centre, or an empty lot takes longer to sell and attracts fewer buyers, so the ceiling drops. Offer a different title and an identical request for funds can come back with a noticeably smaller limit.
The three numbers that move your LVR
The debt side counts everything. Lenders add up every loan registered on the title. If you have a home loan with a redraw facility or a secured line of credit, they’ll usually count the full limit, even the part you haven’t used.
The value side is the lender’s number, not yours. The lender orders its own desktop valuation or a full inspection. That figure can land below the price you paid or what a local agent suggested.
Combined LVR for second-ranking loans. When the new loan would rank behind an existing one, as a second mortgage or caveat loan does, the second lender looks at the total of both loans against the value. Registration order sets which lender gets paid first from a sale, which is exactly why the second lender insists on measuring the whole stack.
A worked example
A café owner in Geelong wants to borrow against their home to fund a second site. The home was bought for $950k a few years ago, and the existing home loan sits at $410k.
| If valued at $950k | If valued at $880k | |
|---|---|---|
| Current LVR | 43% | 47% |
| Debt allowed at a 70% ceiling | $665k | $616k |
| Available after existing loan | $255k | $206k |
| Debt allowed at an 80% ceiling | $760k | $704k |
| Available after existing loan | $350k | $294k |
The interesting line is the second column. A valuation $70k lower than hoped removes about $49k of borrowing capacity at a 70% ceiling, because the debt stays fixed while the value falls. Headroom is always more sensitive to the valuation than the LVR percentage looks. Run your own figures through our LVR calculator or the property equity calculator before you speak to a lender.
Thinking of borrowing against property for the business? Tell us the numbers and we’ll show you what’s realistic.
LVR and related measures
- Loan-to-cost ratio. Development lenders often measure the loan against total project cost as well as end value; see loan-to-cost ratio.
- Lenders mortgage insurance. LMI is mostly a home loan feature triggered above 80% LVR. Business loans secured on property usually price the risk into the lender’s own fees and margin instead.
- Serviceability. A comfortable LVR doesn’t replace serviceability. Banks in particular still need to see that income covers the repayments.
Banks often offer the lowest-cost money for property-secured borrowing when the business also ticks their servicing boxes, so that offer deserves real consideration. If the bank has said no on income or trading history but your LVR has room, home equity business loans and second mortgage business loans lean far more on the property.
Find out what your equity can do
A rough property value plus your current loan balance covers most of what matters here. Our enquiry form asks for those and a few basics about the business, and filling it in is roughly a sixty-second job. No credit enquiry is lodged in your name when you send it, and nobody forwards your file around the market. One of our people looks over the numbers personally, then rings to discuss them. Please be precise with the existing balance and limit, because those two figures decide which structure we suggest on that first call.
Frequently asked questions
How do I calculate my LVR?
Add up every loan secured on the property, including any redraw or line of credit limit, divide by the property's value and multiply by 100. Owing $520k on a property worth $800k gives an LVR of 65%.
What LVR do business lenders allow?
It varies by lender and by security. Well-located residential property normally supports the highest LVR, while commercial, rural, specialised property and vacant land usually get lower ceilings. Short-term private lenders often stay more conservative than banks because they want a clear exit.
Whose valuation is used?
The lender's. It will order a desktop, kerbside or full valuation, and that figure, not the purchase price or an agent's appraisal, is what the LVR is measured against.
Does a line of credit count towards LVR even if I haven't drawn it?
Usually yes. Lenders tend to count the full approved limit of a secured facility, not just the current balance, because you could draw it at any time.
Is a lower LVR always better?
For the lender's comfort, yes, and it tends to widen your choice of lenders and improve the overall cost. But an LVR well under the ceiling is only useful if you can also show how the loan will be repaid.