If you’re thinking of investing in commercial property, understanding the Loan-to-Value Ratio (LVR) is essential. LVR is a key metric that lenders use to assess risk and determine how much they’re willing to lend in any property lending transaction.
While the way LVR is calculated remains the same whether the property is residential or commercial, the way it’s applied is different. The risks for a lender can be higher in commercial property finance so overall, the LVR tends to be lower.
This post aims to break down the basics of LVR and explain how it impacts commercial property finance in Australia.
What is Loan-to-Value Ratio (LVR)?
The Loan-to-Value Ratio (LVR) is a simple calculation that compares the amount of the loan to the value of the property being purchased. It’s expressed as a percentage and is calculated using this formula:
For example, if you’re looking to purchase a commercial property worth $1,000,000 and your lender is offering a loan of $700,000, your LVR would be 70%. In Australia, lenders typically prefer a lower LVR because it signifies that the borrower is contributing more equity, thereby reducing the lender’s risk.
Why is LVR Important in Commercial Property?
LVR is one of the primary factors lenders consider when evaluating a commercial loan application. It helps them assess the level of risk involved in lending you money. The higher the LVR, the more risk the lender is taking on, as there’s a smaller buffer between the value of the property and the amount borrowed.
For commercial properties, the acceptable LVR is often lower than for residential properties. While you might find LVRs of up to 95% for residential homes, commercial properties usually see a maximum of around 65% to 70%. This means investors need to come up with a more substantial deposit—generally 30% to 35%—when buying a commercial property.
At different times, there are some lenders that go to higher LVRs for investors and there are some lenders who’ll go to an 80% LVR if the commercial property is going to be occupied essentially by the ‘Owner’ of the property.
How Does LVR Affect Your Commercial Property Loan?
LVR directly influences the:
1. Loan Amount
A lower LVR typically allows you to borrow more in dollar terms, while a higher LVR might limit the dollar value of the loan.
2. Interest Rates
Generally speaking, a higher LVR often results in higher interest rates, as lenders see the loan as riskier. By reducing your LVR (increasing your deposit), you may secure a more competitive interest rate and save on borrowing costs over the life of the loan.
Maximizing Your Investment with an Optimal LVR
When investing in commercial real estate, it’s crucial to understand that a lower LVR can provide significant benefits. Not only can it improve your chances of loan approval, but it can also reduce your borrowing costs and make your investment more sustainable in the long term.
Here are some strategies to manage your LVR effectively:
- Increase your deposit: The simplest way to lower your LVR is by contributing a larger deposit. This reduces the amount you need to borrow and increases your equity in the property.
- Choose properties with strong value growth: If you purchase a property with good growth potential, its value may increase, allowing you to reduce your LVR over time. This could also provide opportunities for refinancing at a more favourable rate.
- Negotiate better terms: A lower LVR puts you in a stronger position to negotiate terms with your lender, including interest rates and loan features that can benefit your cash flow and long-term profitability.
Key Considerations for Commercial Investors
Understanding LVR helps you better manage your finances and mitigate risk when investing in commercial properties. Keep in mind that every lender will have its own LVR thresholds and lending criteria, so it’s essential to shop around or consult a commercial mortgage broker who can help you navigate the complexities of commercial property finance in Australia.
A well-managed LVR not only positions you for long-term financial success but also reduces the risk of overextending yourself in a volatile market. Whether you’re purchasing your first commercial property or expanding your portfolio, keeping your LVR in check will ensure you’re making smart, sustainable investment decisions.
Next Steps
If you’re ready to explore your commercial finance options or have questions about how LVR affects your borrowing potential, we invite you reach out, make a time to chat with Leanne. We’re here to guide you through the process and help you secure a loan for your needs.
