LVR Refinancing: How Your Loan-to-Value Ratio Affects a Switch

LVR refinancing is the link between your loan-to-value ratio, often shortened to LVR, and your decision to refinance a home loan. Your loan-to-value ratio is the size of your loan measured against the value of your property, written as a percentage. When you refinance, a new lender works out your LVR again using a current property value, and that figure shapes the rate you may be offered, whether lenders mortgage insurance applies, and how much room you have to bargain. The short answer to what LVR means for refinancing is that a lower LVR generally puts you in a stronger position, though the result depends on your circumstances and each lender’s criteria.

This is general information only. What suits you will depend on your circumstances and each lender’s criteria.

The guidance below draws on the Australian Securities and Investments Commission, known as ASIC, and its MoneySmart service, the government’s independent money guidance. Treat this as a way to understand how your loan-to-value ratio works when you refinance, not as advice that refinancing is right for you.

If you are weighing up a move, the rate, costs and lender decisions come together on our refinance home loans hub.

What is LVR, and what is the loan-to-value ratio?

Your loan-to-value ratio is the amount you are borrowing expressed as a percentage of the property’s value. If a property is valued at 500,000 dollars and you owe 400,000 dollars on it, your LVR is 80 percent, because the loan is 80 percent of the value. The remaining share is your equity, that is, the part of the property you actually own outright.

When people ask what LVR means, the simplest way to read it is as a measure of risk from the lender’s point of view. A higher LVR means you have borrowed a larger share of the property’s value and hold less equity. A lower LVR means the opposite, more equity behind you and a smaller loan against the value. That single percentage is why the loan-to-value ratio sits at the centre of a refinance.

How is LVR calculated when refinancing?

LVR refinancing starts with a fresh valuation, because the value used is not the price you originally paid. When you refinance, the new lender assesses what the property is worth now, then measures your remaining loan against that current figure.

Two things can move your LVR since you first borrowed. The loan balance falls as you make repayments, and the property value can rise or fall with the market. If your property has gained value and your balance has come down, your LVR is likely lower than it was at the start, which is the position many people refinance to take advantage of.

Why your LVR matters when you refinance

The loan-to-value ratio influences several parts of a refinance at once.

The first is lenders mortgage insurance. According to MoneySmart, if you have less than 20 percent equity in your home, you might have to pay lenders mortgage insurance, often shortened to LMI. In LVR terms, less than 20 percent equity is the same as an LVR above 80 percent. LMI is a cost that protects the lender, not you, so it is one of the figures that can decide whether a refinance leaves you ahead.

The second is your bargaining position. MoneySmart notes that if you have at least 20 percent equity in your home, you will have more to bargain with. An LVR at or below 80 percent generally signals lower risk to a lender, which can support a stronger negotiation on rate.

The third is the comparison of offers. A lower LVR can widen the set of loans and rates a lender may consider, though the actual outcome still depends on your income, your circumstances, and each lender’s criteria.

LVR, equity and the 80 percent mark

Equity and LVR are two ways of describing the same thing from opposite ends. Equity is the share you own. LVR is the share you have borrowed. They add up to the full value of the property, so an 80 percent LVR is the same as 20 percent equity.

That 80 percent line matters because it is where lenders mortgage insurance tends to come into play. MoneySmart links the LMI question to having less than 20 percent equity, which is the same boundary read from the equity side. If your equity has grown above 20 percent since you first borrowed, you may sit below an 80 percent LVR and avoid LMI on the new loan. If it has not, a new lender may require LMI again, even though you paid it the first time, and that cost can offset the saving from a lower rate.

LVR and LMI when you refinance

Many people ask about LVR and LMI together, because the two are closely tied. LMI is the insurance a lender may require when your LVR is above 80 percent, equal to holding less than 20 percent equity.

The catch on a refinance is that LMI is generally tied to the loan it was taken out for. Moving to a new lender can mean the new lender assesses LMI again on the new loan if your LVR is still above 80 percent. So checking where your LVR sits before you apply is an early step, because it can change the maths of a refinance significantly. It is also worth asking your current lender whether any LMI refund applies when you move early, as this can apply in some cases.

The detail on how this insurance works sits in our guide to what lenders mortgage insurance is, the ways borrowers reduce or sidestep it are in how to avoid LMI, and what it can cost is in LMI cost explained.

How to check your LVR before refinancing

You can work out a rough LVR yourself before you go any further.

A balance of 360,000 dollars against a value of 600,000 dollars is an LVR of 60 percent, which sits comfortably below the 80 percent mark.

This is only an estimate. A lender uses its own valuation, which can differ from yours, so treat your own figure as a guide to whether a refinance is worth exploring rather than a final answer. The way the loan-to-value ratio works for a first purchase is covered in our guide to what LVR means for first home buyers.

What to do once you know your LVR

Knowing your LVR is the start. Whether a refinance pays off comes down to the costs of moving as well as the rate.

MoneySmart suggests contacting your current lender first and asking for a better rate, because you may improve your deal without switching at all. If you do compare other lenders, MoneySmart points to the costs to weigh up, including a break fee on fixed-rate loans, a fee when you close your current loan, application fees, switching fees for internal refinancing, and any stamp duty liability.

MoneySmart also cautions on the loan term. It suggests being firm on the length of home loan you want, otherwise you could end up with a longer loan term than the years left to pay off, and the longer you have a loan, the more you will pay in interest. A lower rate from a healthier LVR does not help much if the term stretches back out.

A mortgage switching calculator can show whether switching will save money and how long it would take to recover the cost of switching. Running your figures through one, alongside your LVR, is how you test the trade-off before you commit.

Where Finance Lab fits in

Working out your loan-to-value ratio gets the decision onto the table. Reading it against your income, your equity, your goals, and a panel of lenders is where it gets personal, and that is where guidance helps. The team at Finance Lab can talk you through how your LVR, the costs of moving, and each lender’s criteria come together for your circumstances.

Frequently asked questions