Lavery came through the ranks at Hillsborough and has made his breakthrough into the first-team this season.
After impressing for the Owls' development squad and enjoying a productive loan spell with League Two side Plymouth, the 21-year-old was given his chance by head coach Stuart Gray and he has repaid that leap of faith with several eye-catching performances.
He scored twice in a 6-0 thrashing of local rivals Leeds before repeating the feat against Birmingham.
"I'm absolutely thrilled to have committed my future to Sheffield Wednesday. It's a massive, historic football club with a brilliant fan base," Lavery told the club's official website.
"A big part of my decision to sign a new deal was down to Stuart Gray for the faith he has shown in me and the environment he has created in recent times.
"I believe I will gain more experience and become a better player by working with Stuart and his coaching staff.
"I take immense pride every time I wear the shirt and I'm excited to be part of this great club's future."