How Loan-to-Value Ratios Work in Commercial Property Finance

In the Australian commercial property market, your Loan-to-Value Ratio (LVR) can make or break a deal. The first thing lenders look at when you apply for Commercial Property Loans is your LVR. This number affects your borrowing capacity, the interest rate you pay, and whether your application is approved.

Many Australian commercial property investors and business owners, especially those new to the field, see LVR and move on. This is a huge mistake. Understanding and leveraging your LVR can save you money, increase the chances of your Commercial Property Loan application being approved, and create a stronger framework for your property transactions.

This blog is about the Australian Commercial Property Loan market and will help you understand LVR better.

What Is a Loan-to-Value Ratio (LVR) and Why It Matters

Simply put, the Loan-to-Value Ratio (LVR) determines how much you are financing in relation to the amount of money you are investing in the acquisition or refinancing of a commercial property.

LVR can be calculated using the following formula:

Example:

Your LVR is 70% if you borrow $700,000 on a commercial property that is valued at $1,000,000.

Understanding the Importance of LVR in Commercial Property Loans

Commercial lenders consider LVR as the measurement of the risk the lender is taking.

A lower LVR indicates:

• More equity/cash contribution
• Stronger security buffer for the lender
• Lower-risk borrower, in general

Higher LVR indicates:

• Closer to the full value of the property being taken as a borrower
• More risk to the lender if the value of the property decreases
• Your loan will most likely have higher interest rates, tough conditions, or may require mortgage insurance

How LVR Works During the Commercial Property Loan Journey

Knowing how LVR is calculated in real-world lending is more than memorising the calculation. The lender uses professional appraisals, analyses the structure of the Commercial Property Loan, and considers the specific characteristics of the property in question.

Step 1: Property Valuation

The lender requests a formal valuation from an external valuer. This valuation is:

• Typically, conservative
• Based on recent comparable sales
• Considers income, zoning, condition, and market demand

A valuer may assess your property, even if you bought it for 1 million dollars, at 950,000 dollars. When calculating LVR, the lender will always take the lowest valuation or the purchase price.

Step 2: Loan Amount Assessment

The total loan amount encompasses:

• The principal loan
• Any capitalised interest
• In certain cases, the fees are added to the loan

This total amount is used in calculating the LVR.

Step 3: LVR Limits and Policy

Once the valuation and amount of the loan are ascertained, the lender will evaluate if your LVR is within the policy limits for:

• The type of property you are financing
• The nature of your financial situation
• The purpose of the loan

If your LVR is too high, the lender may:

• Request that you make a larger deposit
• Ask for additional security
• Reduce the amount of the loan
• Reject the application

Application Stage

LVR helps determine:

• If your proposal meets the risk appetite of the lenders
• What tier of interest rates do you qualify for
• If you have to provide further supporting documents or cheques

Borrowers with LVRs of 60% typically receive approvals more quickly and on more favourable terms than those with LVRs of 75%.

Approval and Settlement Stage

Before settlement, the lenders will:

• Reconfirm their valuation
• Reconfirm the amount of the loan
• Check if the final LVR still meets the lender’s guidelines

When the valuation is lower than expected, it has the potential to increase the LVR and require further negotiations.

Refinancing

When you refinance, lenders will:

• Revalue your property
• Recalculate your LVR
• Evaluate your equity position

If your property value has improved or your debt has decreased, your LVR could be more favourable, which unlocks:

• Improved interest rates
• Increased borrowing power
• Equity access for new investments

Loan Reviews and Renewals

In Australia, most Commercial Property Loans are reviewed and renewed every 3-5 years. During these reviews:

• Your property is revalued
• Your LVR is reassessed
• Your loan conditions may be amended based on your new risk profile

How Different LVR Levels Affect Loan Outcomes

If you are nearing a lender’s LVR limit, a small increase in the deposit amount or an addition of security can greatly improve the loan terms offered to you.

Expert Advice for Managing Your LVR

Pro-Tip: Don’t rely on your purchase price. Lenders use their own (often conservative) valuation to set the LVR.

Pro-Tip: LVR matters not just for buying property. It’s important when refinancing, during scheduled Commercial Property Loan reviews, or in market downturns.

Pro-Tip: Each lender sets their own LVR limits depending on:

• Type of property (office, retail, industrial, medical, etc.)
• Location (CBD vs. regional)
• Borrower profile and market conditions

Pro-Tip: Higher LVR doesn’t automatically mean rejection. Some lenders specialise in higher LVR deals, especially for strong businesses, prime locations, and low-risk sectors. But be prepared for higher costs and stricter conditions.

Conclusion

The Loan-to-Value Ratio (LVR) is probably the most powerful number in commercial property finance. It impacts your chances of receiving an approval, the rate of interest, the structure of the loan, and the ability to borrow in the future.

For Commercial Property Loans in Australia, the knowledge of how LVR operates is imperative. Understanding how lenders evaluate LVR, how it fluctuates over time, and the varying results caused by different LVR thresholds regarding the terms of the loan allows one to be fully prepared to tackle financing.

Navigate LVR with confidence and secure the right Commercial Property Loan for your business. Connect with ARG Finance today.