How LVR Affects Your Home Loan Interest Rate

Your loan-to-value ratio (LVR) can affect your home loan interest rate because many lenders price lower-LVR loans more favourably, since a bigger deposit means less risk for them. The bands differ between lenders and products, so two similar borrowers can be offered different rates.

This is general information only, not financial or credit advice. Rates and LVR tiers change, so confirm the details with your lender.

What LVR means

Moneysmart defines the loan-to-value ratio as the amount of a loan as a percentage of the value of the asset it was used to buy, worked out by dividing the loan amount by the value of the asset. A $560,000 loan against a $700,000 property is an LVR of 80%. The value the lender uses is generally the lower of the purchase price and its own valuation, which is why your LVR can come out higher than you expected.

Why lenders use LVR tiers

A lower LVR means you have more of your own money in the property, so the lender has more cushion if prices fall or a borrower cannot repay. Because of this, many lenders set pricing in bands, with a cut-off at points such as 80%, and often further bands above that. In my experience, it is common to see a better rate offered to borrowers at or below 80% LVR, but exactly where the bands sit, and how large the rate gap is, differs between lenders and between products. Check the tiers for the specific product you are considering.

Moneysmart’s guide to saving for a house deposit says that the lower your LVR, the lower your costs and the better your chance of loan approval.

The 80% line and lenders mortgage insurance

The 80% mark matters for another reason. According to Moneysmart, if your LVR is above 80% you may need to pay lenders mortgage insurance (LMI), a one-off fee that protects the lender if you cannot repay the loan. The Moneysmart LMI glossary notes that it only protects the lender, not you. So crossing 80% can affect you in two ways: the rate you are offered may change, and LMI may be added. Some lenders accept deposits as low as 5%, according to Moneysmart, but a smaller deposit may bring higher costs.

An illustrative example of the cost of a higher rate

Illustrative only. The interest rates below are assumed to show the arithmetic and are not a quote from any lender.

• Property value: $700,000. A $140,000 deposit gives a $560,000 loan, so LVR = 560,000 / 700,000 = 80%.
• A $105,000 deposit gives a $595,000 loan, so LVR = 595,000 / 700,000 = 85%.
• Assume the 80% loan is priced at 6.00% and a higher tier at 6.20%, a 0.20 percentage point gap.
• On the same $560,000 over 30 years, repayments are about $3,357 a month at 6.00% and about $3,430 at 6.20%. That is roughly $73 more a month, or around $26,000 over 30 years.

The point is not the exact figures but the scale: a small rate gap compounds over a long loan. It is worth asking what an extra few thousand dollars of deposit would do to your LVR, and what it would do to the quoted rate and any LMI.

Other things that affect your rate

LVR is only one factor. Lenders may also price differently by whether you are an owner-occupier or an investor, whether the loan is principal-and-interest or interest-only, whether it is fixed or variable, the loan size, and the package or fees attached. The rate on offer to you may also reflect discounts that are negotiable. That is why comparing the comparison rate and fees, not just the headline rate, is sensible.

What to do next

• Work out your LVR on the price you expect to pay, then see how far you are from 80% and from any other band.
• Ask each lender which LVR tiers apply to the specific product you are considering.
• Compare the total cost, including rate, fees and any LMI, across nearby LVR bands before deciding how much deposit to use.
• If you already have a loan, remember your LVR changes as you repay and as the property value moves, which can be a reason to ask about a rate review.
• Talk to a broker or your lender about how their policies apply to your situation.

Related Reading

• Home Lending & Property Glossary
• Should You Refinance? The Simple Maths That Actually Answers It
• What Actually Happens to Your Repayments When the RBA Moves

Written by Michael Wignall, who’s spent 30+ years in banking and home lending across the ACT, Illawarra, and Riverina regions of NSW.

More on this topic is collected in the Finance Strategies for Australians hub.

Related reading:

• Can You Use Gifted Money for a Home Loan Deposit?

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Written by Michael Wignall, Lending Area Manager with 30+ years in banking and home lending across the ACT, Illawarra, and Riverina. Got a question or an idea for a post? Get in touch.