When obtaining a home loan, whether it’s your first or a refinancing, lenders will want to determine your loan-to-value ratio (LVR). This significant figure determines the percentage of your property that you will own from the start and the interest rate you qualify for. The impact of your LVR on your interest rate will now be explored by examining the statistics.
It pays to have more equity and a bigger housing deposit
Your loan-to-value ratio (LVR) at the beginning of your mortgage is determined by the amount of your housing deposit, while in case of refinancing, it is based on your equity. The deposit and equity both represent your financial involvement in your home, which affects the level of risk you pose to the lender. If your financial stake is low, the lender’s financial stake is high, leading to a higher interest rate. Mozo database records reveal that the average variable interest rate for each LVR category decreases substantially as you increase your ownership percentage.
Average variable interest rates by LVR tier (17 May 2023)
| LVR tier | Average variable rate |
| 95% | 6.86% p.a. |
| 90% | 6.22% p.a. |
| 80% | 5.90% p.a. |
| 70% | 5.92% p.a. |
| 60% | 5.57% p.a. |
The amount of deposit and loan-to-value ratio (LVR) that a home buyer chooses can have a significant impact on their monthly repayments. Although a larger deposit and lower LVR may result in higher upfront costs, it can lead to significant savings in interest over the long term. For instance, if Ally is considering purchasing a $500,000 property with a 25-year mortgage, the size of her deposit and LVR will affect her overall home loan expenses. It is important to note that these expenses do not include any fees charged by agents or lenders, or stamp duty.
| Deposit (%) | Deposit ($) | LVR tier | Interest rate | Monthly repayments | Total interest |
| 5% | $25k | 95% | 6.86% p.a. | $3,489 | $546,810 |
| 10% | $50k | 90% | 6.22% p.a. | $3,289 | $486,724 |
| 20% | $100k | 80% | 5.90% p.a. | $3,191 | $457,304 |
| 30% | $150k | 70% | 5.92% p.a. | $3,197 | $459,130 |
| 40% | $200k | 60% | 5.57% p.a. | $3,091 | $427,412 |
Ally has two options for buying a house. If she chooses to spend only $25,000 upfront, she will have to pay $546,810 in interest over the course of her mortgage. However, she may also have to pay Lenders Mortgage Insurance due to her small deposit, which could increase her monthly expenses significantly. On the other hand, if she decides to go for the standard 20% deposit, she will have to pay an additional $75,000 upfront but save $89,506 in interest over time. This would also result in a $298 monthly reduction in her repayments. In the future, if Ally has enough equity and qualifies for a 60% LVR, she could refinance to a lower interest rate and save $398 per month. It is important to carefully consider the impact of your LVR on your short-term and long-term expenses when purchasing a home. Should you buy into the market quickly with a smaller deposit or save more and pay less over time? Comparing your options can help you make a decision that suits your needs.
The information provided is general information only and has been prepared without taking into account your objectives, financial situation or needs. We recommend that you consider whether it is appropriate for your circumstances. Your full financial situation will need to be reviewed prior to acceptance of any offer or product. This article does not constitute legal, tax or financial advice and you should always seek professional advice in relation to your individual circumstances. Subject to lenders terms and conditions, fees and charges and eligibility criteria apply.
