What is a loan-to-value ratio?
A loan-to-value ratio (LVR) is the ratio of a loan amount to the assessed value of the property being used as security. It is expressed as a percentage. For example, a $1.5 million loan secured against a property valued at $2 million represents an LVR of 75%.
LVR is one of the most widely used metrics in property-backed lending. It provides a standardised way to assess the level of security supporting a loan and the potential exposure in the event that the borrower is unable to meet their obligations.
Why LVRs matter in non-bank lending
In non-bank lending, conservative LVRs are a key part of the credit assessment process. A lower LVR means a larger equity buffer between the loan amount and the property value — which provides a greater margin of safety for the lender and, by extension, for the investors whose capital is deployed through lending funds.
Most non-bank lenders in Australia apply maximum LVRs that are typically lower than those offered by mainstream banks for owner-occupied residential mortgages. In the commercial and development lending space, LVRs of 65% to 80% are common, depending on the nature of the project, the quality of the security, and the borrower’s track record.
How LVRs are assessed
The valuation used to calculate an LVR is typically provided by an independent, qualified valuer. This is an important safeguard — it ensures that the property value used in the assessment is not set by the borrower or the lender, but by a third party with no financial interest in the outcome of the loan.
Valuations may be conducted on an “as is” basis (reflecting the current market value of the property), on an “as if complete” basis (reflecting the expected value upon completion of a development), or on a residual basis (taking into account expected development costs and end values).
LVR in the context of portfolio risk
For investors in property-backed lending funds, the weighted average LVR across the portfolio provides a useful indicator of the overall level of security. A portfolio with a lower average LVR generally indicates a more conservative lending approach, with a greater buffer against potential declines in property values.
However, LVR should not be considered in isolation. Other factors — including the quality and location of the security property, the borrower’s capacity to service the loan, and the structure of the lending arrangement — are equally important in assessing overall credit risk.
Related resources from Granor Capital
Loan-to-value ratios are closely linked to independent property valuations, which underpin the credit assessment process. Learn more about Granor Capital’s approach to property-backed lending, or explore the differences between first and second mortgages and how LVR applies to each.
This article is provided for general information purposes only and does not constitute financial advice.
