What is loan to value ratio, and how does it impact your home loan interest rate?
If you are buying your first home, refinancing, or investing in property, one number will follow you through every step of the lending process: your loan-to-value ratio. Most borrowers hear the term, nod along, and then quietly wonder what it actually means for their wallet.
This blog breaks it down clearly, explaining what loan to value ratio is, how it is calculated, and most importantly, how it directly affects the interest rate you are offered and the overall cost of your home loan.
Key takeaways
- A home loan redraw facility allows you to access extra repayments made on your mortgage when needed.
- Extra repayments reduce your loan principal, which directly lowers the interest charged daily.
- Using the home loan redraw facility is significantly cheaper than relying on credit cards or personal loans.
- Redraw facilities are typically available on variable-rate home loans, not fixed-rate loans.
- A redraw facility is best suited for disciplined borrowers who do not withdraw funds frequently.
What is loan to value ratio?
Loan-to-value ratio, or LVR, shows how much of your home loan compares to the property's value. It is expressed as a percentage. Lenders check it to measure loan risk.
Put simply: the more cash you put down (your own money), the lower the LVR, and the safer the lender feels. This boosts your approval chances.
- Low LVR (e.g., 80% or less): You own a big part outright. If things go wrong and they sell the property, they have a safety cushion to get their money back.
- High LVR (e.g., over 90%): You are borrowing most of the value, so the lender takes on more risk.
Know your LVR before applying. It strengthens your position and cuts extra fees like Lenders Mortgage Insurance (LMI).
How is the loan-to-value ratio (LVR) calculated?
The formula is simple:
LVR = (Loan Amount ÷ Property Value) × 100
Example: For a $600,000 property with a $120,000 deposit, you borrow $480,000. So: 480,000 ÷ 600,000 × 100 = 80% LVR.
How does loan to value ratio affect your home loan interest rate?
A lower loan-to-value ratio means you are contributing more equity upfront, which reduces the lender's exposure. In return, lenders reward that lower risk with a more competitive interest rate. The impact is not subtle.
Even a modest difference in LVR can shift you into a different rate tier, and over a 30-year loan, that difference compounds into a very significant sum.
While other factors also influence the rate you are offered — including your income, credit history, loan type, and current market conditions — your LVR is consistently one of the most immediately actionable levers you have.
You cannot change your credit history overnight, but you can make deliberate decisions about your deposit size and property price that directly move your LVR into a better tier.
The four LVR rate tiers
Australian lenders price home loans across four broad LVR bands:
- Below 60% LVR — Lowest risk. Lenders offer their most heavily discounted rates to this group. No LMI required.
- 60% to 70% LVR — Highly competitive rates. Strong equity, low default risk. No LMI required.
- 70% to 80% LVR — Standard market rate pricing. The most common range for Australian borrowers. No LMI required, provided you stay at or below 80%.
- Above 80% LVR — Two costs hit simultaneously: a higher interest rate and mandatory Lenders Mortgage Insurance.
Example: The real cost of your LVR on a $750,000 property
The table below shows how different deposit sizes affect your LVR, interest rate, monthly repayment, and total interest paid over 30 years on a $750,000 property. All repayments are calculated on a principal and interest basis.
| Scenario | Deposit | Loan Amount | LVR | Rate | Monthly Repayment | Total Interest Paid | LMI Required |
|---|---|---|---|---|---|---|---|
| Large deposit | $300,000 | $450,000 | 60% | 5.79% p.a. | $2,638 | $499,509 | No |
| Good deposit | $225,000 | $525,000 | 70% | 5.99% p.a. | $3,144 | $606,936 | No |
| Standard deposit | $150,000 | $600,000 | 80% | 6.19% p.a. | $3,671 | $721,532 | No |
| Low deposit | $75,000 | $675,000 | 90% | 6.49% p.a. | $4,262 | $859,328 | Yes |
Calculated using standard loan amortisation over 30 years. For illustrative purposes only.
What these numbers mean for your wallet
- 60% vs 90% LVR: $1,624 more per month and $359,819 more in total interest over 30 years
- 70% vs 90% LVR: $1,118 more per month and $252,392 more in total interest over 30 years
- 80% vs 90% LVR: $591 more per month and $137,796 more in total interest over 30 years
The 90% LVR borrower also faces an estimated LMI premium of $18,000 to $22,000 added directly to their loan balance, on which they then pay interest for the life of the loan.
A small shift in LVR can make a large difference
You do not need to dramatically overhaul your finances to unlock meaningful savings. On a $750,000 property:
- Moving from 90% to 80% LVR requires saving an additional $75,000 in deposit
- That single shift eliminates up to $22,000 in LMI, reduces monthly repayments by $591, and saves $137,796 in total interest over 30 years
- The combined financial benefit of that extra saving is well over $150,000 across the life of the loan
For many borrowers, the question is not whether improving their LVR is worth it, but how to get there as efficiently as possible. That is where our lending specialists can help.
Note: All interest rate figures and repayment calculations are illustrative market estimates as at May 2026 and do not represent the rates of any specific lender or product. Individual rates will vary based on lender assessment, credit profile, loan type, and market conditions. Speak with a qualified mortgage broker before making any borrowing decisions.
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Loan-to-value ratio and lender's mortgage insurance: What you must know
Lenders' Mortgage Insurance is one of the most misunderstood costs in the home-buying process. Many borrowers assume it protects them if they cannot make repayments. It does not. LMI protects the lender, not the borrower, if the sale of the property does not cover the outstanding debt. You pay the premium, but the cover is entirely for the lender's benefit.
For most Australian lenders, LMI is mandatory once your LVR exceeds 80%. On a $750,000 property at 90% LVR, that premium typically falls between $18,000 and $22,000, added directly to your loan balance. You then pay interest on it for the life of the loan, making the true cost significantly higher than the upfront figure suggests.
This is why the 80% LVR threshold matters. Crossing it eliminates LMI entirely, reduces your interest rate, and lowers your total repayments all at once.
Can you avoid LMI with a high loan-to-value ratio?
Yes, and there are several ways to avoid LMI:
- Home guarantee scheme: Eligible first home buyers can purchase with as little as a 5% deposit, with the government guaranteeing part of the loan, so the lender does not require LMI. Single parents may also qualify for the Family Home Guarantee with a deposit as low as 2%.
- Family guarantor arrangement: A guarantor home loan allows a family member to use their own property equity as security against your loan. This lowers your effective LVR in the lender's eyes and can eliminate LMI completely.
- Profession-based LMI waivers: Some lenders waive LMI for eligible doctors, lawyers, and accountants borrowing at higher LVR levels.
To understand all these options in detail, check out our blog post titled "6 ways to avoid paying LMI charges on home loan".
How to improve your loan-to-value ratio before applying?
Improving your loan-to-value ratio before you apply can have a significant impact on the rate you are offered and the total cost of borrowing. There are several practical strategies worth considering:
- Save a larger deposit: Every additional dollar you put down reduces the amount you need to borrow and improves your LVR immediately. On a $750,000 property, saving an extra $37,500 moves you from 90% to 85% LVR.
- Buy in a more affordable location: Adjusting your target property price or suburb can meaningfully change your LVR calculation without requiring additional savings.
- Use a guarantor: A family member's property equity can be used as additional security, effectively lowering your LVR in the lender's eyes without requiring a larger cash deposit.
- Time your application: Waiting an additional 6 to 12 months to build a higher deposit can save considerably more in LMI and interest than the cost of waiting, particularly in stable or cooling markets.
It is worth noting that in a rising property market, waiting also carries its own risk. A mortgage broker can model both scenarios using real numbers so you can make an informed decision rather than a guess.
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How can refinancing lower your loan-to-value ratio?
One of the most overlooked opportunities in the Australian mortgage market is the refinancing review. Many homeowners who took out a loan several years ago are still paying interest rates that reflect the loan-to-value ratio they had at settlement, not the one they have today.
Over time, your LVR improves in two ways:
- Your outstanding loan balance falls as you make repayments
- Your property's market value may increase, further widening the gap
During the home loan refinancing process, lenders order a fresh valuation and measure your current loan balance against your property's current value. For example, a borrower who purchased a $750,000 property five years ago at 90% LVR, borrowing $675,000, may now have a loan balance of around $620,000.
If the property has grown in value to $870,000, their current loan-to-value ratio is approximately 71%. That shift alone could move them from a high-rate tier with LMI into a significantly more competitive rate band, without saving a single additional dollar.
Loan-to-value ratio for investment properties: Extra considerations
For Australian property investors, the loan-to-value ratio (LVR) is tightly regulated. Because lenders view investment loans as higher risk, they strictly enforce an 80% LVR ceiling. Going above 80% immediately triggers higher interest rate premiums and mandatory Lenders Mortgage Insurance (LMI) costs.
This is where ZedPlus’s dual expertise as an investment loan specialist and tax accountant becomes critical. Structuring an investment loan isn't just about finding a low rate; it requires precise execution across three pillars:
- Loan type: Balancing Principal & Interest versus Interest-Only to optimize your cash flow.
- Ownership structure: Evaluating whether to purchase individually, jointly, or via a trust or company.
- Tax implications: Aligning the debt setup with negative gearing, depreciation claims, and your overall taxable income.
Getting your lending strategy and tax planning right under one roof is incredibly rare. At ZedPlus, it is our standard approach.
Loan-to-value ratio (LVR) FAQs
1. Does my LVR change if I renovate my home?
Yes, it can. Since LVR is based on the current market value of the property, a successful renovation that adds significant value (like adding a bedroom or modernizing a kitchen) can lower your LVR. This is particularly useful if you want to refinance to a lower interest rate tier without paying down the principal faster. However, keep in mind that lenders will require a new formal valuation to recognize this "forced equity."
2. Can LVR affect my ability to use an offset account?
Directly, no — but indirectly, yes. Some lenders reserve their "Basic" home loan products (which often lack offset account and redraw facility features) for borrowers with higher LVRs to mitigate risk. Conversely, "Package" loans that include offset accounts are often more easily approved or offered with fee waivers for borrowers with an LVR of 80% or below.
3. What happens to my LVR if property prices in my area drop?
If the market value of your home decreases, your LVR will rise because your debt remains the same while the asset's value shrinks. While this doesn't usually affect your current repayments, it can "lock" you into your current lender. If your LVR rises above 80% due to a market dip, you may find it difficult to refinance to a new lender without being hit with a new Lenders Mortgage Insurance (LMI) bill.
4. Does LVR work differently for construction loans?
Yes. When building a home, lenders calculate LVR based on the "as-if-complete" valuation. They take the value of the land plus the cost of the building contract. Because construction carries more risk (e.g., builder insolvency or cost overruns), some lenders may cap the maximum LVR lower than they would for an established home, often requiring at least a 10% to 20% deposit.
5. Is LVR the only thing lenders look at for risk?
While LVR measures the security of the asset, lenders also look at your Debt-to-Income (DTI) ratio. Even if you have a perfect 60% LVR because of a large inheritance, a lender may still decline the loan if your income isn't high enough to comfortably service the monthly repayments. LVR covers the "what if we have to sell it" scenario, while DTI covers the "can you pay us back every month" scenario.
6. Does the type of property affect LVR limits?
Absolutely. Lenders have different risk appetites for different "security types." For example:
- High-density apartments: Some lenders cap LVR at 70% or 80% if the apartment is under a certain size (e.g., 40sqm).
- Postcode restrictions: In mining towns or areas with high supply, lenders may reduce the maximum allowable LVR to protect themselves against price volatility.
- Acreage/Rural: Properties with large land sizes may have lower LVR ceilings because they are harder to sell quickly.
Final thoughts on loan-to-value ratio
Your LVR is one of the most powerful numbers in your home loan journey. It shapes the interest rate you are offered, determines whether you pay LMI, and influences the total cost of borrowing over decades. The good news is that it is also one of the few factors you can actively improve before you apply.
Whether you are saving a larger deposit, considering a guarantor, or exploring whether refinancing could unlock a better rate tier, small moves in your LVR can translate into very large savings.
Not sure where your LVR sits or what your next step should be? Our lending specialists at ZedPlus can run the numbers with you and map out the clearest path forward. Book a call today and find out exactly what your LVR means for your home loan.
