Refinancing your mortgage can be a smart financial move—whether you’re aiming for lower interest rates, better loan terms, or accessing your home equity for a renovation project. However, one of the most important factors to consider when refinancing is your Loan to Value Ratio, or LVR. Lenders heavily rely on this figure when evaluating the risk involved in refinancing, so knowing where you stand can make all the difference between securing a favorable deal or being stuck with less attractive terms.
LVR meaning “Loan to Value Ratio” refers to the percentage of your property’s value that you’re looking to borrow. It’s calculated by dividing your outstanding loan amount by the current appraised value of your property and then multiplying by 100. For instance, if your home is worth $600,000 and you owe $300,000, your LVR is 50%. Understanding the implications of your LVR is crucial when refinancing because it influences not only the interest rates you qualify for but also the range of refinancing options available to you.
How LVR Affects Your Refinancing Options
When lenders look at refinancing applications, the LVR gives them an idea of how much equity you have in your property. Equity is the portion of your home that you truly “own”—calculated as the property’s current market value minus the remaining balance on your loan. A higher LVR means you have less equity in your home, while a lower LVR means you have more.
In general, the lower your LVR, the better your chances of getting approved for a refinance at favorable rates. If your LVR is above 80%, lenders may see your loan as riskier, and you may need to pay for Lender’s Mortgage Insurance (LMI) to protect the lender against default. This additional cost can reduce the financial benefits you hope to achieve by refinancing. Therefore, managing your LVR effectively is crucial if you want to optimize your mortgage and minimize costs.
Benefits of a Low LVR When Refinancing
1. Better Interest Rates
One of the biggest benefits of having a low LVR when refinancing is that it often qualifies you for better interest rates. Since lenders view low-LVR borrowers as less risky, they’re more likely to offer you competitive rates that can lead to significant savings over the term of your mortgage. Even a slight reduction in interest rates can result in thousands of dollars saved in the long run, which is why keeping your LVR in check should be a top priority if you’re planning to refinance.
For instance, if your LVR is 60%, lenders are more likely to offer you their lowest available rates. This is because the lower the LVR, the more equity you have in the property, which makes the loan less risky for the lender. A reduced interest rate could also mean that you can pay off your mortgage faster, as more of your payments will go toward reducing the principal rather than interest charges.
2. Avoiding Lender’s Mortgage Insurance (LMI)
Another important aspect of refinancing with a favorable LVR is avoiding Lender’s Mortgage Insurance. LMI is typically required for borrowers with an LVR above 80%. Even if you’ve been a responsible borrower who has never missed a payment, refinancing with a high LVR could result in additional LMI charges—an expense that can be significant and add to your overall debt.
By aiming for an LVR of 80% or lower, you can avoid these extra costs entirely. This makes refinancing much more affordable, allowing you to fully benefit from lower interest rates or better loan terms without paying extra fees that add no value to you but only protect the lender.
How to Improve Your LVR Before Refinancing
If your LVR is higher than you’d like it to be, there are several strategies you can use to improve it before refinancing. Lowering your LVR not only increases the chances of your refinancing application being approved but also ensures that you get the best possible terms.
1. Pay Down Your Mortgage
One of the simplest ways to lower your LVR is to pay down your mortgage balance before refinancing. By making extra payments whenever possible, you can reduce the amount owed, which in turn lowers your LVR. Even small additional payments can make a difference over time, helping you build more equity in your property.
For example, using any extra income like bonuses or tax refunds to pay down your mortgage can have a big impact on your LVR. Every dollar that reduces the principal of your loan effectively increases the equity you have in your home.
2. Increase Your Property Value
Another way to improve your LVR is to increase the value of your property. This can be done by making improvements that add to the market value, such as a kitchen renovation, bathroom upgrade, or adding a deck or patio. Enhancing the curb appeal by updating the landscaping can also be effective.
For instance, if your property’s value rises from $600,000 to $650,000 while your mortgage balance remains at $300,000, your LVR will decrease from 50% to approximately 46%. This increase in equity can put you in a much stronger position when refinancing, giving you access to better loan products and rates.
3. Wait for Market Appreciation
Sometimes, the best strategy is to wait until market conditions work in your favor. If property prices in your area are on the rise, simply waiting can help reduce your LVR without any additional effort. As the value of your home increases, your LVR will naturally decrease, making it easier to refinance at a lower rate.
While waiting for market appreciation can be a passive strategy, it’s particularly useful if you’re not in an urgent rush to refinance. Keep an eye on the local real estate trends, and when you see an uptick in property values, it could be the right time to initiate the refinancing process.
Common Pitfalls to Avoid
When refinancing, it’s important to be mindful of certain pitfalls that could negatively affect your LVR and overall refinancing prospects.
1. Over-borrowing
One of the common mistakes people make is over-borrowing when refinancing. If you choose to access your home equity for additional funds—perhaps for a renovation or investment—this will increase your LVR and might push it over the 80% mark. While it may seem tempting to tap into your home’s equity, doing so without careful consideration could lead to higher costs due to increased interest rates or the need for LMI.
2. Ignoring Fees and Costs
Refinancing isn’t just about reducing your interest rate; there are fees and costs involved as well. These can include valuation fees, application fees, and break costs for exiting your current loan. All of these fees can add to your total loan amount, potentially increasing your LVR if you’re not careful. Before refinancing, make sure you calculate all the associated costs and ensure your new loan will provide genuine savings.
Conclusion
Understanding your LVR meaning and how it impacts your mortgage is crucial when considering refinancing options. A lower LVR is key to accessing better interest rates, avoiding lender’s mortgage insurance, and generally improving your loan terms. By making extra repayments, investing in property improvements, or waiting for market appreciation, you can improve your LVR and enhance your financial standing when refinancing.
Whether you’re looking to reduce your interest rate, shorten your loan term, or access equity, a favorable LVR can make all the difference in the success of your refinancing journey. It’s well worth taking the time to assess your LVR and consider the strategies mentioned to lower it before you apply—giving you the best chance of securing a refinancing deal that aligns with your financial goals.
