It starts with the valuation, not the price.
Written for: Property investors, developers and business owners
"How much can I borrow?" is usually the first question. When the loan is secured by property, the answer starts with three letters: LVR.
The loan-to-value ratio is the loan amount as a percentage of the property's value. It's the number that most shapes how much a lender will advance, what the loan costs and which lenders will look at the deal at all.
Take a hypothetical property valued at $1m. A loan of $600,000 against it is a 60% LVR. A loan of $750,000 is 75%. The higher the LVR, the less equity sits between the loan and the property's value.
Every lender sets a maximum LVR for each kind of deal. That maximum, applied to the value, sets the ceiling on the loan. Other factors, such as the exit or the borrower's position, can bring the figure down from there, but they rarely push it above the cap.
One detail catches borrowers out. In private lending, prepaid or capitalised interest and the lender's fees usually count inside the loan amount. A loan at a given LVR can put noticeably less cash in hand than the headline figure. Private loan rates and costs explains how.
LVR is the lender's margin of safety. If a loan goes wrong and the property has to be sold, the sale needs to cover the loan, the interest that has built up, the selling and legal costs, and any fall in the market along the way. A property sold by a mortgagee is sold on the lender's timetable, not the market's, and that rarely helps the price.
The equity below the cap is what absorbs all of that. LVR isn't a measure of how much a lender trusts the borrower. It's a measure of how much room there is if things go wrong.
Lenders lend against value, and the value they rely on comes from an independent valuer they instruct themselves. A report the borrower ordered, or the price agreed with a vendor, is useful background, but it isn't what the lender relies on. On a purchase, lenders typically use the lower of the price and the valuation.
The valuer isn't asked what the property is worth to this buyer. The question is what it would sell for in the market, and some lenders also ask what it would sell for within a limited time. That's why a valuation can come in below the contract price, and why a borrower who paid a premium, or bought off market, can find the loan smaller than expected. Lenders don't lend against what a property cost. They lend against what it would fetch if they had to sell it.
The cap isn't one number. It moves with how readily the security would sell.
Property type. A standard house or a well-located industrial unit has a deep pool of buyers. Specialised assets, such as a purpose-built facility, a hotel or a single-use building, have fewer, so lenders usually allow a lower LVR. Commercial property is assessed asset by asset for the same reason.
Location. Property in capital cities generally sells more readily than regional or remote property, and lenders reflect that in the cap. Vacant land and rural holdings usually sit lower again, because they produce little or no income and can take longer to sell.
The lender's position. A first mortgage is repaid first from a sale, so it supports a higher LVR than a loan that ranks behind it.
For a second mortgage or caveat loan, the lender looks at combined LVR: all the debt secured on the property, first and second, measured against its value. On the same hypothetical $1m property, a first mortgage of $400,000 and a second of $200,000 make a combined LVR of 60%. The second lender is repaid only after the first, so the combined figure is what tells it how much cover it really has.
Development loans are measured differently, because the security doesn't yet exist in its finished form. Lenders typically test the loan against two figures. Loan to cost (LTC) compares the loan with the total cost of the project: land, construction, professional fees, interest and contingency. The second compares the loan with the gross realisation value (GRV), the expected sale value of the finished project.
A deal has to work on both. A project can look comfortable against its end value and still ask the lender to fund too much of the cost, or the other way round. Loan to cost shows how much of the risk the developer is carrying. The GRV test shows whether the finished product repays the debt. More on this in development finance.
Maximum LVRs vary widely across lenders, property types and locations, and they move as the market does. We work with more than 70 private and non-bank lenders and stay across what they're funding right now. You can see what our lenders are funding across each loan type.
If your scenario fits, we can connect you with the lenders it suits. The lender instructs the valuation, assesses the deal and makes the credit decision. Where a bank is the better fit, it goes through our trusted broker network.
We work on commercial and business-purpose loans only. If you need a home loan, personal loan or any other consumer loan, we'll put you in touch with one of our trusted brokers.
This article is general information only. It isn't financial, credit or legal advice and doesn't take into account anyone's particular circumstances. Lending decisions are made by the lender.
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