How do LVR tiers affect your interest rate?

Most borrowers know a bigger deposit avoids Lenders Mortgage Insurance, but fewer realise it can also affect the interest rate itself. Lenders price loans in loan to value ratio bands, so where you sit can change your rate. Here is how loan to value ratio tiers work and why they matter.

What loan to value ratio means

The loan to value ratio is the size of your loan as a percentage of the property value. A 20 per cent deposit gives an 80 per cent loan to value ratio, a 10 per cent deposit gives 90 per cent, and so on. The lower the ratio, the more of the property you own outright, which the lender sees as lower risk.

Why lenders price in tiers

Lenders treat a lower loan to value ratio as lower risk, because there is more equity buffer if values fall or a loan goes bad. To reflect that, many lenders price loans in bands, offering a sharper rate at lower ratios and a higher rate as the ratio rises. So your deposit can influence the rate you are offered, not just the insurance.

Common breakpoints

While each lender sets its own structure, common breakpoints sit around 60, 70 and 80 per cent, with a clear step at 80 per cent. Some lenders reserve their sharpest rates for borrowers at or below 60 per cent, with slightly higher rates between 60 and 80, and higher again above 80. The exact tiers and the size of the gaps vary by lender.

The 80 per cent line is the big one

The most important breakpoint is 80 per cent. At or below it, you generally avoid Lenders Mortgage Insurance and access better rates. Above it, you usually pay the insurance premium and may face a higher rate. That is why getting to a 20 per cent deposit, an 80 per cent ratio, is such a common goal, it helps on both fronts.

Small differences in deposit can matter

Because of these tiers, a relatively small change in your deposit can sometimes move you into a better band, improving your rate or removing insurance. So it can be worth knowing where the breakpoints sit for the lenders you are considering, because a little more deposit may pay off more than you expect.

Many products require 80 per cent or below

It is also worth knowing that some sharper products, packages and promotions, including certain cashback offers, are only available at a loan to value ratio of 80 per cent or below. So a lower ratio can open up options that are simply not offered to higher ratio borrowers, which is another reason the deposit matters.

Equity can move you down the tiers over time

You do not only move down the tiers by saving a bigger deposit upfront. As you repay your loan and as your property value grows, your loan to value ratio falls, which can let you refinance into a better band later. So even if you start above 80 per cent, building equity can improve your position over time.

Work out where you sit

Because tiers and breakpoints vary by lender, the useful step is to see where your deposit places you and whether a small change would help. A broker can show you the loan to value ratio bands across lenders, whether you are close to a better tier, and what that would mean for your rate, usually at no cost to you.