Loan to Value Ratio (LVR), Security and Collateral
Security decides what the bank loses if it is wrong. It does not decide whether it is wrong.
BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED
// THE SHORT ANSWER
The loan to value ratio (LVR) divides a loan, with any debt ranking ahead of it, by the independently valued asset securing it — the margin by which the value can fall before the security stops covering the debt. A bank counts security at what a receiver would realise, not at book value, and lends against the cash flow first: collateral is the second way out and cannot justify a loan on its own. Development lenders also read loan to cost and presales; farm lenders, debt per unit of production.
BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.
// MAKE THE CALL
Issue 08 — Basalt Ridge Developments. A new-to-bank developer, a claimed 28% ROE and two other banks circling. Your bank has a growth target. Your call first, then the senior banker's.
// WHAT A BANK TAKES, AND WHAT IT IS WORTH
A bank lends against a business's cash flow and takes security for the day the cash flow fails. On that day the question is not what an asset is worth to a going concern but what a receiver would collect for it, after the time a sale takes and the costs it incurs. The gap between the two is the reason every form of security is counted at less than its book value.
| Dimension | WHAT THE BANK HOLDS | WHY IT IS WORTH LESS THAN IT SAYS |
|---|---|---|
| PROPERTY | WHAT THE BANK HOLDSA mortgage over land and buildings. | WHY IT IS WORTH LESS THAN IT SAYSA forced sale takes months and costs fees; a specialised building has few buyers. |
| RECEIVABLES | WHAT THE BANK HOLDSThe right to collect what customers owe. | WHY IT IS WORTH LESS THAN IT SAYSThe debts that are hardest to collect are the ones left when a business fails. |
| STOCK | WHAT THE BANK HOLDSGoods held for sale, and materials. | WHY IT IS WORTH LESS THAN IT SAYSAged, seasonal or part-finished stock sells for a fraction of cost. |
| PLANT AND FLEET | WHAT THE BANK HOLDSMachinery, vehicles, fit-out. | WHY IT IS WORTH LESS THAN IT SAYSFit-out and made-to-order plant are worth little to anyone else. |
| A GUARANTEE | WHAT THE BANK HOLDSA person's or a related company's promise to pay. | WHY IT IS WORTH LESS THAN IT SAYSWorth what the guarantor owns and can reach — and it is often the same family's money. |
// 01 — THE RATIO ITSELF
The loan to value ratio divides the loan — with any debt that ranks ahead of it — by the value of the security. A loan of 60 on an asset valued at 100 is a 60% LVR: the value can fall by 40% before the security stops covering the debt. That margin is the whole point of the ratio, and it is only as good as the value underneath it — an independent valuation, at a date, of an asset that may not sell at that price when it has to.
// 02 — DEVELOPMENT: COST, AND WHO HAS ALREADY BOUGHT
A development loan is secured on something that does not exist yet, so the end value is a forecast. Development lenders therefore read two other measures beside it. In Issue 08, Basalt Ridge Developments asks for US$8.5m of senior debt for 24 townhouses at 55% of total cost:
Presales: 40% of the debt — about US$3.4m presold, against US$5.1m at the bank's 60% policy line
Loan to cost shows how much of the money going into the ground is the bank's: the developer's own equity sits underneath, and it is the first thing lost if costs overrun or prices fall. Presales show how much of the end value is already sold to buyers who have paid deposits, which is the only part of the forecast a lender can rely on. In Issue 08 both point the same way — presales twenty points short of policy in a suburb where prices are down 4% in six months, and a 3.5% contingency against the 5–10% development lenders expect — and the claimed 28% return on the developer's past projects has no settlement statements behind it. The security would be there. The numbers that make it worth what the deck says are not.
// 03 — FARMS: DEBT PER UNIT OF WHAT THE LAND PRODUCES
Farm lenders take a mortgage over the land, but land values move with commodity prices, so they measure debt against what the land produces as well as what it is worth. In Issue 03, Kauri Dairy Holdings carries NZ$13.0m of term debt on two farms producing 620,000 kilograms of milk solids:
Debt per kilogram does what LVR cannot: it ties the debt to the farm's earning power at any milk price. Here the security was never the question — the succession was. The family proposed moving the land into a trust and splitting the farms between two successors, and asked the bank to release the patriarch's guarantee at signing. The senior read keeps the guarantee and releases it in stages, as each successor proves over demonstrated seasons that their own entity carries its share: a reminder that restructuring the security changes who the bank is lending to.
// 04 — A TRADING BUSINESS: EVERYTHING, AND LESS THAN IT LOOKS
A manufacturer's bank usually takes a general security agreement over all its assets. At its FY25 year-end Highview Industries, in Issue 04, had receivables of US$4.58m, stock of US$4.37m and plant of US$10.93m against US$7.60m of bank debt. On the balance sheet the cover looks ample. What a receiver would collect is another matter: the ledger of a failed manufacturer collects slowly and with disputes, part-finished components are worth little to anyone else, and specialised plant sells at a fraction of its carrying value.
Where a facility leans on receivables and stock, a borrowing base makes that discount explicit, lending an advance rate against eligible assets as they move. Highview's senior read declined one — not because the security was weak but because the cash flow was strong enough that the cost of the machinery was not worth it. That is the order a desk reads in: the cash flow first, the security second, and the structure last.
// STANDARDS THIS SITS BESIDE
The recognised ground this page sits beside. Each was opened and checked when cited; none is a source for the framework itself.
- European Banking Authority, Guidelines on loan origination and monitoring (EBA/GL/2020/06), paragraph 143 and section 7.1, paragraphs 206–214 — Collateral alone cannot justify a loan — it is the bank's second way out, not the primary source of repayment — and it should be valued at origination by recognised standards, with the value, method, assumptions and uncertainty stated and critically reviewed.
- OCC, Comptroller's Handbook: Commercial Real Estate Lending, Version 2.0 (March 2022) — loan-to-value definition, page 26; sources of repayment, page 54 — LTV is the loan, with senior liens, divided by the value of the property securing it, at origination; US examiners treat collateral as generally a tertiary source of repayment, after the borrower and any guarantor.
- APRA, Prudential Standard APS 220 Credit Risk Management (2023), paragraphs 42 and 47–52 — Australian banks may not rely unduly on collateral in place of a credit assessment, and must value it independently at a fair value that allows for the time it takes to realise.
- Basel Committee on Banking Supervision, Basel Framework, CRE20.74–20.75 (in force 1 January 2023) — Defines LTV as the loan amount, including undrawn commitments, over a prudently and independently appraised value that excludes expected price rises.
// QUESTIONS PEOPLE ASK
- What is a loan to value ratio (LVR)?
- The loan divided by the value of the asset securing it, usually expressed as a percentage — also called LTV. Any debt ranking ahead of the bank on the same asset is counted with the loan, and the value is measured by an independent valuation, normally at the time the loan is made. It tells the bank how far the asset's value could fall before the security no longer covers the debt.
- What LVR will a bank lend at?
- It depends on the asset, the borrower and the bank's policy, and this site does not publish a figure. Assets that sell quickly at a predictable price support a higher LVR than specialised ones; income-producing property is read differently from development land; and regulators in some countries set limits for particular kinds of residential lending. Whatever the policy, a bank lends against the cash flow first and the LVR only limits what it will do.
- What is the difference between LVR and loan to cost?
- LVR divides the loan by what the finished or existing asset is worth; loan to cost divides it by what the project costs to build. Development lenders read both, because a project can be well within its LVR on the valuer's end value and still be funded by a bank putting in most of the cost — and the end value is a forecast, while the cost is money already being spent.
- What is a general security agreement?
- A charge over all of a company's present and future assets — receivables, stock, plant and equipment — rather than over one named asset. It is the usual security for a trading business's bank facilities in New Zealand and Australia. Its value depends on what those assets would realise if the business failed, which is usually much less than the balance sheet shows.
- Does security make a loan safe?
- No. Security reduces what the bank loses if the loan fails; it does not make the loan less likely to fail. Supervisors are explicit that collateral cannot justify a loan on its own: the primary source of repayment is the borrower's cash flow, and security is the second way out, reached only after the first has closed.
// THE FILE WHERE THE SECURITY WAS THERE
A new-to-bank developer, a claimed 28% return and two other banks circling. Make the call before you read the senior banker's.
Open Issue 08 →