The little-known money-saving trend refinancers need to know

Woman thinks of her LVR on her home loan

Refinancing a home loan can feel increasingly like a gambit. You’ll need to avoid the home loan hostage trap, compare mortgages until you find the deal, and face some incredibly steep serviceability tests

But since one of the main reasons to refinance is to save money, is there a secret money-saving hack you need to know to refinance? 

Indeed there is – and it’s called your loan-to-value ratio. So what is your LVR, and how can it help you save money when refinancing a home loan?

What is your loan-to-value ratio?

House balanced on a seesaw with coins, representing your loan to value ratio

Your loan-to-value ratio, or LVR, is how much you’ve borrowed in a home loan divided by the total value of your property. You can think of it like this equation:

  • LVR = loan value/home value

LVRs are usually expressed as a percentage. For example, lenders may say a specific mortgage offer requires an LVR less than or equal to 80%. 

When you first take out a home loan, your LVR is established by the size of your home deposit – usually at least 20% of the property’s value. Your home deposit is a security downpayment that helps you own part of your property from the start. 

If you pay a 20% deposit, then your LVR is 80% because you’ve already covered the first 20% of your property’s value, while the loan pays the rest when you buy it.

A smaller deposit (10%) would give you a higher LVR (90%), while a bigger deposit (40%) would give you a lower LVR (60%), and so forth.

Why is your LVR important when refinancing your home loan?

Man looks clever thinking about the trick of using LVR to his advantage when refinancing his home loan

Because your LVR establishes how much of your property you own, it partially determines your degree of financial risk to the lender. Risky borrowers usually cop higher interest rates and fees, while safer borrowers get rewarded with lower ones. So if you’re calculating the true cost of a home loan, your LVR is essential to know because it determines which interest rates you’re eligible for. 

Your LVR usually lowers with time as you pay off your home loan. The more you pay off, the lower your LVR. But that’s just one half of the equation. If your home value rises due to capital growth, your LVR may actually go down faster than you thought.

As a result, refinancers may enjoy a unique edge when it comes to LVR. Since you’ve paid off more of your mortgage and property prices tend to rise as a rule, you may qualify for betters interest rates than you think! In fact, CoreLogic reports that home values rose +0.9% in Australian capital cities over July – the fifth consecutive month of growth this year.

A property valuation can help you determine how much your home is worth. Once you know what you’re sitting on, you can compare the amount left on your loan balance.

How much can you save when refinancing with a low LVR?

Refinancing down LVR tiers can be a significant way to save money on your interest repayments. Generally speaking, low LVRs get lower interest rates than high ones

Here is a breakdown of the average variable interest rate for different LVR tiers in the Mozo database, assuming a $500,000 owner-occupied loan with 20 years left on its term making principal & interest payments.

Savings by LVR tier – 9 August 2023

LVR
Average rate
Monthly repayments
Total interest
60%
6.52%
$3,734
$396,101
70%
6.57%
$3,748
$399,640
80%
6.60%
$3,757
$401,766
90%
6.91%
$3,850
$423,887
95%
7.16%
$3,925
$441,918

The differences in overall cost are more subtle for LVRs below 80% than they are above 80%. Even just dropping down from 95% to 90% could save you up to $75 per month – and $18,031 over the lifetime of your home loan.

How to use LVR to your advantage when refinancing

Man gives thumbs up on his laptop about using his low LVR when refinancing

So how can refinancers turn their new LVR knowledge into a cost-saving hack?

The first step is to know your LVR before submitting a refinance application. Knowing this number can assist you in comparing home loans, since you know what you can qualify for and can suss out the interest rates and potential savings between offers. 

If your LVR is higher than you thought (perhaps you’ve accidentally slid into negative equity), it could be wise to lower it if you can before refinancing. The most common ways to reduce your LVR include:

  • Boosting your home’s value through home improvements and renovations. One study found that adding energy-efficient features like solar panels can add up to 10% to a property's price. 
  • Paying off your mortgage through making extra repayments, if your home loan allows this. 

However, both of these options require you to fork out a little money. If you’re refinancing because you’ve hit mortgage stress, it may not be worth it to add to your cost pressures. Consult a financial adviser to see if these tactics could be right for you.

Compare refinance home loans in the table below.

Compare refinance home loans - last updated 4 March 2024

Search promoted home loans below or do a full Mozo database search. Advertiser disclosure
  • Offset Home Loan

    Package, Owner Occupier, LVR<60%, Principal & Interest

    interest rate
    comparison rate
    Initial monthly repayment
    6.15% p.a. variable
    6.40% p.a.

    Ability to open up to 10 offset accounts per loan account. Fast online application. Linked Debit Mastercard® with fee-free access at ATMs across Australia. Package a credit card with your home loan and the annual card fee will be waived (T&Cs apply). 40% deposit required.

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  • Neat Home Loan

    Owner Occupier, Principal & Interest, LVR <60%

    interest rate
    comparison rate
    Initial monthly repayment
    6.09% p.a. variable
    6.11% p.a.

    Competitively-priced variable rate loan. Ideal for owner occupiers and investors. No service fees to pay. Make free extra repayments and redraws. Flexible repayment schedule available.

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  • Straight Up

    Obliterate, Owner Occupier, Principal & Interest, <50% LVR

    interest rate
    comparison rate
    Initial monthly repayment
    6.24% p.a. variable
    6.24% p.a.

    Get a low variable rate depending on your deposit with Athena’s Straight Up Variable Home Loan. AcceleRATES feature helps you to reduce your home loan even faster (T&Cs apply). Zero fees to pay. Free redraw facility. Handy mobile app to manage your home loan.

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  • Flex Home Loan

    Fixed, Owner Occupier, Principal & Interest, LVR <60%

    interest rate
    comparison rate
    Initial monthly repayment
    6.64% p.a.
    fixed 3 years
    6.52% p.a.

    Competitive Fixed rate. Multiple offset accounts available. Borrowers can also make extra repayments. Redraw facility available. Simple online application process. 40% deposit required.

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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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