What does LVR mean?

LVR is one of the first numbers a lender works out when you offer security. It tells the lender how much of the security’s value the loan would use up. That, in turn, tells it how much buffer it has if the security ever needs to be sold.

The definition

Moneysmart defines LVR as “the amount of a loan as a percentage of the value of the asset it was used to buy”. business.gov.au describes it as “the ratio of a loan amount to the market value of the property or asset it was used to purchase”.

In business lending, the security often isn’t the thing you are buying. You might borrow against your home or a warehouse to fund stock, an acquisition or an ATO debt. The calculation is the same: loan divided by the value of the security.

The formula

LVR = loan amount ÷ value of the security × 100

You can also work backwards:

Maximum loan = value of the security × maximum LVR

Worked examples

Example 1: a single loan. Moneysmart’s example: a $450,000 loan against a $600,000 property is a 75% LVR.

• 450,000 ÷ 600,000 = 0.75, or 75%

Example 2: working out a maximum loan. Illustration only, using round numbers that are not any lender’s limits. A commercial property is valued at $800,000, and the lender’s maximum LVR for this example is 65%.

• Maximum loan = $800,000 × 65% = $520,000

Example 3: an existing loan. The same $800,000 property already has a $300,000 loan against it.

• Current LVR = 300,000 ÷ 800,000 = 37.5%
• Room to the 65% example cap = $520,000 − $300,000 = $220,000

That $220,000 is the usable equity in this example. Property-backed business finance explains how usable equity works.

How valuations affect LVR

The value used in the calculation is the lender’s valuation, not what you think the property is worth, what you paid for it or an online estimate. Lenders generally order a valuation from a valuer they approve.

A lower valuation pushes your LVR up. Using the example above, if the valuation comes in at $700,000 instead of $800,000:

• Maximum loan at 65% = $455,000, down from $520,000
• Usable equity with the $300,000 existing loan = $155,000, down from $220,000

A $100,000 lower valuation cut the usable equity in this example by $65,000. That is why it’s worth building a buffer into your plans, rather than borrowing right up to your estimate.

Some valuations also allow for a shorter selling period, sometimes called a forced sale or mortgagee value. That usually produces a lower figure.

Why lenders cap LVR

A lender that has to sell the security needs enough value left over to cover:

• a fall in the market between lending and selling
• selling costs, such as agent, legal and holding costs
• unpaid interest and fees that have built up
• the time it takes to sell

The cap is the lender’s buffer. The riskier or harder to sell the security, the lower the cap tends to be. LVR limits vary by lender and security type.

Residential, commercial and vacant land

In general terms:

• Residential property is usually the easiest to value and sell, so it tends to support the highest LVRs.
• Commercial property often has lower LVR limits. Its value depends more on the tenant, the lease terms and the local market, and it can take longer to sell.
• Specialised property, such as purpose-built sites, may have lower limits again.
• Vacant land usually has the lowest limits and is accepted by fewer lenders. It produces no income and can be slow to sell.

Location matters too. Lenders may be more cautious with regional or rural property, or with very small units.

Combined LVR with first and second mortgages

If more than one loan is secured on the same property, lenders look at combined LVR.

Combined LVR = (first mortgage + second mortgage or caveat loan) ÷ property value × 100

Illustration only. A home valued at $1,000,000 has a $500,000 first mortgage. You want a $150,000 business loan on a second mortgage.

• First mortgage LVR = 500,000 ÷ 1,000,000 = 50%
• Combined LVR = (500,000 + 150,000) ÷ 1,000,000 = 65%

The second lender looks at the 65% figure. It is repaid only after the first lender if the property is sold, so it needs the combined debt to sit comfortably below the property’s value. Second mortgages and caveat loans are explained in caveat loans and bridging finance.

LVR on equipment and vehicles

The same idea applies to equipment and vehicle finance. The lender compares the amount financed with the asset’s value. A deposit or trade-in lowers the LVR, and a large balloon keeps more of the debt outstanding for longer. See equipment finance explained.

Step by step

1. List each property or asset you could offer, with a realistic value. Recent sales of similar properties nearby can help, but expect the lender’s valuation to be different.
2. Get payout figures for every loan secured on each property.
3. Work out the current LVR for each property.
4. Test your plans at a lower valuation, for example 10% below your estimate, to see how much buffer you have.
5. Remember that LVR sets the most a lender will lend against the security. The business still has to afford the repayments. See how much can my business borrow?

Important things to know

• LVR is only one test. Meeting a lender’s LVR doesn’t guarantee approval. Serviceability, credit history and purpose still count.
• Values move. If the property’s value falls during the loan, your LVR rises, even if you haven’t borrowed more.
• A high LVR costs more. Loans closer to the lender’s cap are riskier for the lender and are often priced higher.
• Borrowing to the limit leaves no buffer. A lower LVR keeps some equity in reserve if your plans change.