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Development Finance

LTC Vs LVR In Development Finance

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Quick answer

Lenders compare two core leverage tests

2 key ratios

LTC measures total project cost. LVR measures security value.

  • Primary leverage tests lenders use 2 Ratios
  • LTC focuses on Project cost
  • LVR focuses on Property value
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In development finance, LTC means loan to cost and LVR means loan to value. They sound similar, but they measure two different things and lenders often look at both before setting a funding limit.

LTC compares the proposed loan against the total development cost. LVR compares the loan against the underlying or completed value of the security property, depending on how the lender structures the deal.

A lender may approve a project only when it fits both the allowed LTC and the allowed LVR, which is why developers can be limited by cost, value, or whichever ratio produces the lower loan amount.

What projects are funded?

LTC and LVR are two of the main metrics lenders use when deciding how much they will advance against a development project

The purpose of these ratios is to measure leverage from two different angles: total project cost and property value

Lenders use them because each ratio answers a different question:

  • iconIs the borrower contributing enough equity to the total deal?
  • iconWould the lender still be protected if values soften?
  • iconDoes the facility sit within policy based cost limits?
  • iconDoes the project stack up against current or end value?
  • iconIs there enough buffer for overruns, delays, or market change?
  • iconWhich ratio creates the lower, safer loan amount?

How Development Finance Works

In development lending, LTC and LVR are not interchangeable. They are separate tests used together

LTC is based on the project budget. LVR is based on the value of the security property, which may be the as is value, in one line value, or end value depending on the transaction.

A simplified way to think about the comparison is:

  • 01 Land cost
  • →
  • 02 Build cost
  • →
  • 03 Total cost
  • →
  • 04 Security value
  • →
  • 05 Ratio tests
  • →
  • 06 Final limit

The lender then works to the more conservative outcome. If the deal passes LTC but fails LVR, the value test may cap the loan. If it passes LVR but fails LTC, the cost test may cap it instead.

LTC Vs LVR Explained

Development loans are often assessed with both ratios in mind, even if one is the headline policy measure

Ratio 01

LTC, or loan to cost

LTC measures the loan as a percentage of the total development cost, including land, construction, professional fees, interest and other approved costs

Ratio 02

LVR, or loan to value

LVR measures the loan as a percentage of property value. In development deals this may be assessed against current value, as if complete value, or end value depending on lender policy

Typical lender approach Use both
  • LTC checks leverage against cost
  • LVR checks leverage against value

A common structure is that the lender will apply a maximum LTC policy and a maximum LVR policy, then lend up to the lower result. This reduces the risk of overfunding a project that looks acceptable on only one measure.

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Development Feasibility

Before a lender can calculate LTC or LVR properly, it needs reliable cost and value inputs

That means the quality of the feasibility study and valuation directly affects the leverage outcome

Information commonly used to assess LTC and LVR includes

  • iconLand acquisition cost
  • iconFixed price or assessed build cost
  • iconConsultant and professional fees
  • iconSelling costs and GST treatment
  • iconContingency and cost escalation
  • iconTotal project cost
  • iconEnd value or gross realisation value
  • iconDeveloper margin and equity contribution
15 - 20 %
Strong cost evidence helps support the LTC test, while strong valuation evidence supports the LVR test. If either side is weak, the lender may reduce the loan amount, require more equity, or decline the proposal.

Pre Sales

The answer depends on the lender, the asset type, and the deal structure, but most lenders treat both as important and complementary

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Why LTC matters

LTC helps lenders control exposure to the actual dollars required to finish the project. It is closely linked to equity, budget discipline and cost management.

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Why LVR matters

LVR helps lenders understand their security position against market value. It becomes especially important if the project needs to be sold, refinanced or enforced.

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What borrowers should watch

Borrowers should avoid focusing on only one ratio. A project can look strong on cost but weak on value, or strong on value but too aggressively geared on cost.

Common problems

Many borrowers assume LTC and LVR are basically the same. They are not, and misunderstanding the difference can lead to unrealistic borrowing expectations

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Assuming LTC and LVR are identical

They measure different things, so the same project can produce two very different maximum loan figures

Possible solutions include:
  • icon Model both ratios before applying
  • icon Check whether the lender is using as is or end value
  • icon Use a broker or lender term sheet to confirm policy
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Using the wrong value basis

Some lenders assess LVR against current value, while others may rely on an as if complete valuation subject to conditions

If the value basis is unclear, borrowers may need to secure:
  • icon Clarification on valuation method
  • icon Independent valuation guidance
  • icon Revised funding assumptions
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Ignoring soft costs in LTC

Borrowers sometimes focus only on land and build cost, but lenders may include interest, fees, contingencies and selling costs in total project cost

A fuller feasibility can materially change the LTC outcome.
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Expecting the higher ratio to win

Lenders usually work to the tighter result, not the more generous one

Solutions may include:
  • icon Reducing debt
  • icon Contributing more equity
  • icon Restructuring the facility
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How To Compare LTC And LVR

Step

01

Work out the full development budget, including all soft costs and contingency

Step

02

Confirm which costs the lender will include in total project cost

Step

03

Obtain clarity on the valuation basis the lender will use for LVR

Step

04

Model the proposed loan amount against both LTC and LVR

Step

05

Identify which ratio creates the lower funding limit

Step

06

Adjust equity, project scope or structure if one ratio is too tight

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Speak with a Development Finance Specialist

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LTC and LVR policy can vary significantly between lenders, especially depending on project type, valuation method, presales, and the borrower's equity position.

A specialist can review your feasibility and explain which ratio is likely to control the deal and how much funding may actually be available.

Speak with a finance specialist about LTC, LVR and your development funding options.

Submit the short form below and a development finance specialist will review your project, compare the likely LTC and LVR outcomes, and discuss funding options.

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Additional Questions

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