How Equity and LVR Can Lower Your Interest Rate
One of the biggest things that decides your rate isn’t your bank. It’s how much of your property you own. If your home has gone up in value, you may already qualify for a cheaper rate and not know it.
This page covers the third C of credit: Capital. Lenders are asking: if something goes wrong, what do we have to fall back on? That’s your deposit or equity, and the property itself. Read the full guide to the 4Cs.
What is LVR?
LVR stands for loan to value ratio. It’s how much you owe compared to what the property is worth.
Example: your home is worth $800,000 and you owe $560,000. Your LVR is 70%.
The lower your LVR, the less risk the lender takes on. That’s why many lenders offer cheaper rates at lower LVRs.
How LVR changes your rate
Many lenders set their rates in tiers. Common cut-off points are 80%, 70% and 60%. Each step down can unlock a sharper rate. Above 80%, you’ll usually pay Lenders Mortgage Insurance (LMI) as well.
Tiers and rates vary from lender to lender, so the lender that’s cheapest at 85% may not be the cheapest at 65%.
Your equity may have grown without you noticing
Two things lower your LVR over time: paying down your loan, and your property going up in value.
Example: you bought for $700,000 with a $600,000 loan, an LVR of about 86%. A few years later your home is worth $850,000 and you owe $580,000. Your LVR is now about 68%. That could move you down two rate tiers. Your current lender may never tell you.
This is one of the most common reasons refinancing saves people money.
How to get the best valuation
When you refinance, the new lender gets the property valued. A good valuation can lower your LVR. You can help it along.
Think about selling a classic car. The seller who has every receipt, the service history and photos of the work gets a better price than the one who just says “it’s in good nick”. Your home is the same.
- List your improvements. New kitchen, bathroom, roof, solar, landscaping. Note what you spent and when.
- Keep your receipts and plans ready to show.
- Know your local sales. Note recent sales of similar homes nearby.
- Present the home well. Tidy, clean and easy to access on the day.
- Be there if you can, so you can point out what the valuer might miss.
A broker can often get an upfront valuation from more than one lender before you apply. That way, you pick the lender that values your home well.
The property itself matters too
Lenders also look at what kind of property it is. Most houses, townhouses and standard units are easy. Some properties have fewer lenders or a lower maximum loan, such as:
- Small units and studios with a small living area
- Serviced apartments and some high-density towers
- Several dwellings on one title that isn’t strata titled
- Large rural or acreage blocks
If your property is one of these, the right lender matters even more than the rate.
Where Capital fits in your Credit Ready Check
In our Credit Ready Check, your Character and Capacity decide which of the four boxes you sit in. Capital then fine-tunes which lenders and rate tiers are open to you. Strong equity can open doors that a tight budget alone wouldn’t.
FAQs
What is a good LVR for a home loan?
80% or less usually means no LMI. 70% or less often unlocks sharper rates, and 60% or less can unlock the best tiers with many lenders.
How do I find out my LVR?
Divide your loan balance by your property’s value, then multiply by 100. A broker can get an up-to-date valuation to check.
Will my current lender lower my rate if my LVR drops?
Some will if you ask and give them a new valuation. Many won’t do it automatically.
Can I use my equity to consolidate debts or renovate?
Often, yes. Just keep in mind that borrowing more raises your LVR and may change your rate tier.
Albert Waldron is a Credit Representative (407514) of Australian Finance Group Ltd, Australian Credit Licence 389087. This is general information only and does not take into account your personal circumstances. Please seek advice before acting. Credit Ready Check is a free lending review, not a credit repair service.