Understanding LVR, Offset, and Redraw
Home loan jargon can be confusing, but understanding key terms can save you thousands of dollars. Here is a clear breakdown of three of the most important concepts.
LVR — Loan to Value Ratio
LVR is the percentage of the property value you are borrowing.
Formula: LVR = (Loan Amount ÷ Property Value) × 100
Example: Borrowing $400,000 on an $800,000 property = 50% LVR
Why LVR Matters
- Below 80% LVR: No Lenders Mortgage Insurance (LMI) required, access to better interest rates
- 80–90% LVR: LMI applies, higher rates likely
- Above 90% LVR: Higher LMI premiums, fewer lender options
LMI — Lenders Mortgage Insurance
LMI protects the lender (not you) if you default. Costs range from $5,000 to $30,000+ depending on loan size and LVR. It is either paid upfront or added to the loan.
How to Improve Your LVR
Offset Account
An offset account is a transaction account linked to your home loan. The balance in the account is "offset" against your loan balance, reducing the interest you pay.
Example:
Benefits of an Offset Account
Long-Term Impact: Maintaining an average $50,000 offset balance on a $400,000 loan at 6% could save over $100,000 in interest over 30 years.
Partial vs Full Offset
Redraw Facility
A redraw facility allows you to access any extra repayments you have made above your minimum.
Example: If your minimum repayment is $2,000 and you have been paying $2,500, you have $500/month in redraw available.
Benefits of Redraw
Redraw vs Offset: Key Differences
| Feature | Offset Account | Redraw Facility |
|---|---|---|
| Accessibility | Instant (debit card/ATM) | May take 1–5 days |
| Account type | Separate transaction account | Part of home loan |
| Tax (investors) | Savings are tax-free | Redrawn funds may affect tax deductibility |
| Fees | Sometimes monthly fee | Often free |
Which is Better? For most borrowers, especially investors, an offset account offers greater flexibility and tax advantages. For owner-occupiers focused purely on reducing interest, either works well.
Putting It All Together
Understanding LVR helps you avoid unnecessary LMI costs. Using an offset account reduces your interest daily. Making extra repayments and using redraw builds a financial buffer.
Together, these tools can shave years off your loan and save tens of thousands in interest. Ask your lender or broker which features are available on your loan.