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Refinancing your home loan? Here's why you should consider your LVR first

Alex Ritchie avatar
Alex Ritchie
- 5 min read
Refinancing your home loan? Here's why you should consider your LVR first

There are a range of factors to keep in mind when refinancing a home loan, but you may not be thinking about your loan-to-value ratio (LVR). Did you know your LVR plays a considerable role in the switching process?

If you’re looking to refinance to lock in a lower-rate home loan, particularly in a time of rising rates, your LVR is a key component in nabbing a competitive rate. But if you’ve recently purchased a home and its value has fallen, you may not be in the greatest position to refinance

Whatever your home loan refinancing goals are, you’ll want to consider your LVR first.

What is a home loan LVR?

Firstly, it’s worth understanding what your home loan LVR is, so you can see how it impacts your refinancing application

Your loan-to-value ratio is the difference between the amount you’re borrowing (the loan) to the value of the property expressed as a percentage.

For example, if you want to buy a home that is $600,000 and you have a $120,000 deposit (20% of the property price), you would be borrowing $480,000 as a mortgage. The loan-to-value ratio in this instance would be 80%, as you’re borrowing 80% of the value of the property.

If your LVR is above 80%, you’ll need to pay Lender’s Mortgage Insurance (LMI). This can climb into the tens of thousands of dollars range depending on the value of your property.

When it comes to refinancing and your LVR, you’ve likely been repaying your mortgage for some years. This means you may have reduced your loan amount owing, as well as seen an increase in the value of your property over time.

Generally, when a homeowner chooses to refinance it’s because their LVR is now smaller. For example, after 5 years on the same home loan, you may have reduced your loan amount to, say, $420,000. The property could have also increased in value to, say, $700,000. This means your LVR would now be 60%.

But if your property has fallen in value and your LVR has risen, you may need to factor in paying LMI into your refinancing budget.

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How your LVR impacts your refinancing goals

Let’s explore the good news and the not so good news about LVRs for homeowners hoping to refinance.

  • Bought in the last few years? You may want to hold off

Unfortunately, if you purchased a home in the last two years, your property value may have declined. Even homeowners diligently repaying their mortgage on time could find themselves with higher LVRs than they started because of this.

The latest CoreLogic data shows that prices have fallen 2.8% in Sydney and 1.8% in Melbourne over the June 2022 quarter. While these declines may only be short-term, if you’re looking to refinance today to avoid the sting of the latest interest rate hikes, you’ll need to tread carefully.

It’s generally recommended that homeowners wait a few years before refinancing so you have time to reduce your home loan amount and lower your LVR. If your property value has fallen and your LVR has increased above 80%, you will need to pay LMI when you refinance. Not only will this additional cost need to be accounted for, but you may not qualify for some of the lowest interest rates on the RateCity database, because…

  • Lower LVR can mean a lower home loan rate

Some of the lowest home loan interest rates on the RateCity database are reserved for refinancers with LVRs at 70%-60% or less. If your LVR has fallen to this level or below, you may be in a better financial position to potentially nab a rock-bottom home loan rate. In the current environment of rising home loan rates, this could mean a difference in thousands of dollars in interest charges just for having a lower LVR.

Before you consider refinancing your home loan, take the time to calculate your current LVR. This may involve engaging with a professional valuer for the property. If you refinance the new lender will value your property regardless, so it may be nice to have a second, independent, opinion.

If your LVR is above 80%, or if your property value has fallen since you purchased it, it may be worth holding off on refinancing until conditions are more stable. Alternatively, you will need to factor in the extra cost of LMI into your switching budget. You can also expand your research into more competitive refinance home loans with LVR criteria that suits your current situation

  • Note - LMI can be added on to your home loan amount, but by repaying it over a 25-30- year term, you’ll likely pay more in interest charges for the LMI than if you paid upfront.

Refinance comparison tables could come in handy here as you can narrow down your home loan search based on your own specific requirements. Comparison tables allow you to compare apples with apples, in that you can view home loan options side by side based on your financial needs. You can then easily view interest rates, fees, and features to narrow down your short list.

Compare home loans in Australia

Product database updated 22 Jun, 2024

This article was reviewed by Personal Finance Editor Georgia Brown before it was published as part of RateCity's Fact Check process.