With property value rising should your mortgage rate be falling?

As property values once again chart an upward trajectory, home equity will be increasing for many Australians. But are mortgage holders missing a trick by failing to refinance to the lower rates available for borrowers with greater equity?

It’s no secret that the value of property across the country has been on the rise in recent months. In fact, values are now higher than ever.

The latest data from CoreLogic not only revealed that housing values are now 1.0% higher than they were before the pandemic, they’re 0.7% higher than they were at their previous peak back in October 2017. 

As a result, the medium national dwelling value is now sitting at $583,157, while Sydney’s (the country’s most expensive market) medium value is $879,299.

According to Mozo Property Expert, Steve Jovcevski, rock bottom home loan rates and increased positivity are fuelling this fire and encouraging buyers to enter the market.

“When you’ve got many rates in the 2.00% range and even lower like we do at present, that increases the purchasing power of borrowers and, as a result, borrowers respond by paying higher prices. Buyers may also be encouraged by the fact that we’re seemingly on the road to recovery from COVID-19 in Australia,” he says.

“We’ve certainly seen plenty of first home buyers entering the market by taking advantage of these low rates as well as measures like the First Home Loan Deposit Scheme (FHLDS) and the HomeBuilder scheme.

“But if prices keep increasing as they’re expected to, I think it’s likely that we’ll see first home buyer action taper off a little. They may start to be replaced by investors who I expect to return later in the year, especially given that responsible lending laws are being rolled back in March.”

Greater equity, lower rates?

For owners, the recent increases in property values across most markets will no doubt come as welcome news. But there may be a second benefit that many mortgage holders either won’t be aware of, or haven’t yet acted on.

As property values increase so does home equity. Equity, in this instance, is the difference between what a property is worth and the outstanding balance of any mortgage on it.

Why is this beneficial? Well, more equity can be useful for a number of reasons, including getting a lower mortgage rate.

During the home loan application process lenders assess the loan-to-value ratio (LVR) of a borrower in order to determine their risk - so the more equity a borrower has, the lower their LVR will be and the ‘safer’ they’ll be regarded.

Jovcevski explains that some lenders offer more competitive rates for safer borrowers, so increased property values may have pushed some owners into lower LVR tiers which present them with an opportunity to refinance to a better rate.

“First home buyers, for example, who borrowed at 85% or 90% LVR a couple of years ago may now be in a position or in the near future to consider refinancing,” he says. “That’s because the value of their property may have gone up, so they could be under the 80% LVR threshold which allows them to refinance without paying lenders mortgage insurance again.

“Of course, the same applies to more established borrowers as well. There are certainly better rates out there for borrowers with LVRs at 70%, 60% and even 50%, so it's certainly a good time to look around for a better rate if your property value has increased.”

The impact of LVR on your rate

So just how much of a difference does the loan-to-value ratio have on your home loan rate?

As mentioned above, LVR is just one of the factors used by lenders in the mortgage approval process. But as the figures from the Mozo database in the table below demonstrate, the difference between the average rates only available at specific LVR tiers can be sizeable.

According to Mozo Banking Expert, Peter Marshall, this trend towards rewarding ‘safer’ borrowers has actually ramped up in the past year.

“We’ve seen a whole bunch of lenders introduce tiered pricing for their home loans of late. This is another indication that lenders are keen to get more lower risk loans on their books, which is why they’re happy to give customers who fall into that category a better deal.”

Online lender Athena has even introduced an ‘automatic’ discounting process with its AcceleRATES Variable Home Loan which drops borrowers on to a lower interest rate as soon as they hit a new LVR tier.

RELATED: Aussies still prefer houses to apartments, but is that set to change?

Ready to see if you could benefit from a rate drop? Get started by comparing your existing rate to some of the great offers in the table below, or head on over to our home loan comparison hub to view more loans from an even larger range of lenders.

**The average rates are based on loans available at a particular LVR tier, accurate as of 23 February, 2020. Calculation based on an owner occupier making principal and loan repayments on a $400,000 loan over a period of 25 years.