Understanding Loan-to-Value Ratio (LVR) in Australian Commercial Lending

What Is LVR?

LVR stands for Loan-to-Value Ratio. It's the percentage of a loan amount compared to the total value of the secured asset, typically a commercial or investment property. The formula is simple: LVR = (Total Loan Amount ÷ Property Value) × 100.

For example, if your property is valued at *$1 million, and your combined loans (first and second mortgages) total $750,000, your combined LVR is 75%

In the non-bank lending world, the maximum loan-to-value ratio for second mortgages typically caps out at 75% gross.

Understanding Gross Loan Amount

What does “gross” mean? It includes:

• The cash you receive (net loan proceeds)

• Prepaid or capitalised interest (common on short-term second mortgages)

• Lender, broker, legal, and establishment fees

  
  

This is crucial: even if you only need $120,000 for business use, if the fees and prepaid interest total $25,000, the lender assesses the full $145,000 against your property’s value.

Second Mortgages vs Unsecured Business Loans: What’s the Difference?

Many businesses in Australia weigh two options when seeking additional funding:

1. A second mortgage (secured loan)

2. An unsecured business loan

   
   

Here's how they differ:

Feature	Second Mortgage	Unsecured Business Loan
Security	Secured against property	No security required
Lender Risk	Lower (secured by asset)	Higher (no collateral)
Interest Rates	Typically lower (due to reduced risk)	Higher (reflecting unsecured nature)
Loan Size	Larger amounts possible, tied to available equity	Usually smaller, based on cash flow
Term Length	Short to medium term (often 3–12 months)	Short term (often 3–12 months)
Approval Speed	Fast with private lenders (often 2–5 days)	Fast (same day to 3 days)
Use of Funds	Broad — working capital, expansion, renovations	Often restricted to short-term cash needs

Because second mortgages are backed by tangible security, lenders can offer lower interest rates and larger amounts than unsecured business loans. This makes them especially attractive for businesses that own property but want to avoid high-cost, high-risk unsecured borrowing.

Why Second Mortgages Often Offer Lower Rates

Unsecured business loans are priced based on risk to the lender. Without any collateral, the lender relies solely on your business cash flow, turnover, and credit history. This often results in:

• Higher interest rates (sometimes 18–30% per annum)

• Shorter terms (to reduce lender exposure)

• Smaller maximum loan sizes

  
  

In contrast, a second mortgage is secured against your property, meaning the lender has a legal claim on a valuable asset. Even though they sit behind the first mortgage, the risk profile remains significantly lower than that of unsecured lending. This allows private and non-bank lenders to offer:

• Interest rates often ranging 12–24% per annum (depending on risk)

• Larger loan sizes (linked to property equity and capped at 75% gross LVR)

• Flexible terms (from 6 months to 3 years, depending on purpose)

  
  

For businesses seeking to fund larger projects or stabilize their cash flow over a longer term, second mortgages offer a more affordable and scalable solution.

When Should You Consider a Second Mortgage?

A second mortgage isn’t just a last-resort tool. Businesses across Australia use them strategically to:

• Unlock equity for working capital

• Fund renovations or commercial property upgrades

• Purchase new inventory or equipment

• Expand operations or open new locations

• Consolidate short-term business debts

  
  

By leveraging the unused equity in your property — up to a maximum of 75% gross LVR — you can access critical funds without touching your first mortgage.

Real-World Scenario

Let’s walk through a real-world scenario:

• Property value: $1,000,000

• First mortgage: $600,000

• Target combined LVR: 75% → $750,000 total debt limit

  
  

Available for second mortgage = $750,000 - $600,000 = $150,000 gross.

Now, let’s break that down:

• Net funds you want: $130,000

• Prepaid interest: $12,000

• Fees (lender, legal, broker): $8,000

  
  

• Gross loan amount: $130,000 + $12,000 + $8,000 = $150,000.

  
  

This means for a 75% LVR second mortgage, you as the borrower will receive $130,000 as your net proceeds.

How Innovate Funding Helps

At Innovate Funding, we specialize in non-bank and private commercial lending solutions across Australia. Here’s how we help you navigate second mortgages and LVR limits:

• Accurate LVR calculations: We ensure you know your total gross exposure, factoring in fees and prepaid interest, so you understand precisely how much you can access.

• Maximized net outcomes: We negotiate the best terms to ensure the highest possible cash in hand from your approved LVR cap.

• Tailored lender matching: We work with a panel of non-bank lenders willing to go up to 75% gross LVR — even for second mortgages, even for short-term needs.

• Fast approvals: Unlike banks, our lending partners move quickly, often approving deals within 48–72 hours.

• Clear exit strategies: We help you plan how to repay or refinance the second mortgage, ensuring the solution fits your long-term business goals.

  
  

Understanding Your Funding Options

Understanding LVR — especially how gross loan amounts shape your borrowing capacity — is crucial when considering a second mortgage business loan. While the 75% gross LVR cap sets the maximum exposure, Innovate Funding works hard to maximize the net cash you receive by structuring the deal smartly.

Second mortgages offer significant advantages over unsecured business loans, providing lower interest rates, larger loan sizes, and access to untapped property equity — all without disturbing your primary mortgage.

If your business is ready to unlock new funding opportunities, explore tailored second mortgage solutions with Innovate Funding. We’re here to guide you through the process, connect you with the right lenders, and help you achieve your business goals with confidence.

Contact Us Today

If you are looking to understand more about second mortgages and how they can benefit your business, contact us today to learn how we can help structure your next second mortgage!