The Loan-to-Cost Ratio (LTC) is one of the most important metrics in commercial property and development finance. As Australia faces a shifting economic landscape in 2025—with tighter credit markets and evolving construction costs—understanding LTC is more crucial than ever for property investors, developers, and business owners seeking funding. Whether you’re planning to break ground on a new project or refinance an existing one, knowing how LTC works (and how lenders are viewing it this year) could make or break your deal.
What Is Loan-to-Cost Ratio (LTC)?
The Loan-to-Cost Ratio measures the size of a loan against the total cost of a real estate project, expressed as a percentage. Unlike Loan-to-Value Ratio (LVR), which compares the loan to the appraised value of a finished project or property, LTC focuses on the actual costs required to complete the project—including land acquisition, construction, permits, and soft costs.
- LTC formula: LTC = (Loan Amount / Total Project Cost) x 100%
- Example: If your total project cost is $10 million and the lender offers $7 million, your LTC is 70%.
This distinction matters: LTC tells lenders (and borrowers) how much of the project’s cost is being financed and how much equity the borrower must contribute up front.
Why LTC Matters in 2025
With the Reserve Bank of Australia maintaining a cautious stance in 2025 and ongoing cost inflation in the construction sector, lenders are scrutinising project viability and risk more than ever. LTC ratios are front and centre in this risk assessment. Here’s why:
- Risk Control: Lower LTC ratios mean borrowers have more equity in the deal, reducing default risk for lenders.
- Capital Requirements: As APRA’s prudential standards tighten, many banks are limiting LTC to 65–70% for most commercial developments, compared to 75% or higher in previous years.
- Market Uncertainty: Volatile construction costs and supply chain delays are prompting lenders to re-calculate acceptable LTCs more frequently, sometimes requiring updated cost estimates before loan approval.
For borrowers, this means greater scrutiny of project budgets and a higher bar for equity contributions. In practice, developers may need to provide 30–40% of project costs from their own funds or through equity partners.
LTC vs. LVR: Navigating the Differences
While both LTC and LVR influence how much you can borrow, they play distinct roles in property finance. Here’s how they compare:
- LTC: Focuses on project cost. Used primarily for construction and development loans.
- LVR: Focuses on market value (usually post-completion). Used for standard property loans and refinancing.
In 2025, lenders may use both metrics to set loan terms. For example, a lender might cap funding at the lower of 70% LTC or 65% LVR, whichever is more conservative. This is particularly relevant for projects in regional areas or sectors facing valuation headwinds.
Real-World Examples: LTC in Action
Case 1: Boutique Apartment Development, Melbourne
A developer estimates total project costs at $12 million. The lender, wary of rising build costs and potential value fluctuations, offers up to $8 million (66% LTC). The developer must source the remaining $4 million in equity. If the project’s final valuation is only $11 million, the effective LVR drops below 73%—highlighting why both metrics are checked.
Case 2: Industrial Warehouse, Brisbane
With construction costs stabilising in Queensland, some non-bank lenders are offering LTCs up to 75% for pre-leased warehouse projects. However, they may require additional guarantees or interest rate premiums to mitigate risk.
Tips for Borrowers: Navigating LTC in 2025
- Get Detailed Cost Estimates: Lenders want robust, third-party-verified budgets—including contingencies for cost overruns.
- Build Equity Early: The more cash you can contribute up front, the stronger your negotiating position.
- Understand Lender Preferences: Non-bank lenders may offer higher LTCs, but with higher rates and stricter covenants.
- Monitor Policy Shifts: APRA, RBA, and state governments may adjust lending guidance if market conditions change.
Conclusion: LTC Is the New Deal-Maker
As the Australian lending environment tightens in 2025, the Loan-to-Cost Ratio has become a deal-defining metric for property and development finance. Understanding how LTC is calculated—and how it impacts your funding—gives you an edge when negotiating with banks, non-bank lenders, or equity partners. Get your numbers right, stay on top of policy changes, and structure your deals to suit the market’s risk appetite.
