How your LVR tier could get you a lower home loan interest rate

Collage of people comparing LVR interest rates.

Whether you’re refinancing or taking out your initial home loan, lenders will be keen to establish your loan-to-value ratio (LVR). This critical number determines how much of your property you’ll own from day dot, as well as what interest rate pay. 

When you first get your mortgage, your LVR will depend on the size of your home loan deposit. If you’re refinancing, it will depend on your home equity. Both your deposit and equity establish your financial stake in your home, and therefore how risky you are to the lender.

But how much does your LVR affect your home loan interest rate? Let’s look at the numbers.

Average variable interest rates by home loan LVR tier

According to data from the Mozo database, the average variable interest rate for each LVR tier drops significantly the more of your home you own. 

Average variable interest rates by LVR tier (8 February 2024)

LVR tierAverage variable rate
95%
7.38% p.a.
90%7.13% p.a.
80%6.85% p.a.
70%6.80% p.a.
60%6.77% p.a

So how much of a difference could this make to your monthly repayments? While stumping up a larger deposit and lower LVR can increase your upfront costs, long-term it could mean thousands of dollars less in interest, plus avoiding the pain of Lenders Mortgage Insurance.

The differences between 60% and 80% LVR interest rates may not be huge, but the difference between 95% and 80% certainly is. 

Borrower scenario: How home loan LVR tier affects mortgage repayments

Collage of people cost crunching their home loan by their house.

Let’s say Ally wants to buy a $500,000 house with a 25-year mortgage, but can’t decide what size home loan deposit (and therefore which LVR tier) she should go for.

Here’s a breakdown of some of her home loan costs, not including any agent/lender fees or stamp duty.

Deposit (%)Deposit ($)LVR tierInterest rateLoan amountMonthly repaymentsTotal interest
5%
$25k
95%
7.38% p.a.
$475k$3,473$566,965
10%$50k90%7.13% p.a.$450k$3,218$515,377
20%$100k80%6.85% p.a.$400k$2,789$436,687
30%$150k70%6.80% p.a.$350k$2,429$378,776
40%$200k60%6.77% p.a.$300k$2,077$322,957

If Ally decides to have a 5% deposit and only spend $25k upfront, she would pay $566,965 in interest over the life of her mortgage. She would also likely have to pay Lenders Mortgage Insurance (LMI) because she’s buying with a small deposit, which could add to her monthly costs considerably.

If she opts for the standard 20% deposit, she would pay $75k more upfront but save $130,278 in interest over time. It would also bring down her monthly repayments by $684, plus any Lenders Mortgage Insurance she wouldn't have to pay. 

Later on, if she’s built up enough home equity and qualifies for a 60% LVR, Ally could refinance from her current interest rate to a lower one. For instance, if she dropped from 7.38% to 6.77%, she could save $1,396 a month. 

With the cost of financing a home skyrocketing, it’s vital to weigh up how a simple number like your LVR can impact your short-term and long-term costs. Is it better to buy into the market quicker with a smaller deposit, or save harder for longer and pay less over time?

Laying it all out and comparing your options can help you reach a decision that works for you. 

Compare low interest rate home loans below.

Compare low interest home loans - last updated 28 May 2024

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* WARNING: This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan. The comparison rate displayed is for a secured loan with monthly principal and interest repayments for $150,000 over 25 years.

** Initial monthly repayment figures are estimates only, based on the advertised rate. You can change the loan amount and term in the input boxes at the top of this table. Rates, fees and charges and therefore the total cost of the loan may vary depending on your loan amount, loan term, and credit history. Actual repayments will depend on your individual circumstances and interest rate changes.

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