Low Deposit Home Buyers Beware of the Low Equity Premium

Record low interest rates might look very attractive, but if you’ve got a low deposit, you could be stung by the low equity premium.

Another day, another new low mortgage rate! A race to the bottom isn’t usually regarded as a good thing. But for those seeking a cheap mortgage, the regular lowering of bank interest rates can only be a good thing.

But while there are some very, very good deals out there if you’ve got at least a 20% deposit. If you’ve got a smaller deposit … not so much!

A double whammy

If you take a quick glance at a bank’s new low interest rate number, it’s easy to miss the little asterisk beside it, or not grasp the use of the word special to describe it.

Look a little closer and you’ll see that together they point you in the direction of a list of conditions, the most important usually being that the special rate only applies to those people with a 20% deposit or greater.

If you’ve a smaller deposit, you’ll need to look at the standard rate, which will be a lot higher. And, to make matters worse, if you’re with the four main banks, you can expect to take another hit in the form of a low equity premium (LEP).

What is a low equity premium?

An LEP represents extra interest, or an additional one-off charge, on top of your mortgage. Depending on the size of your deposit and your lender, it can range from an extra 0.25% to 1.5% per annum, or a 2% premium on the amount of your loan.

LEPs were initially put in place by the banks to cover the extra costs associated with the introduction of the loan-to-value ratio restrictions, in 2013. But even though the LVRs have been scrapped, LEPs remain. And when added to already higher interest rates for those with low deposits, the result can add up to a sizeable difference from the ultra-low special rates that are advertised.

For those with less than a 20% deposit, three of the four major banks charge LEPs as annual extra interest charges (figures correct as of 25/5/2020):


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Special fixed 1-year rate: 2.79% p.a. (Minimum 20% equity)

Standard fixed 1-year rate: 3.75% p.a.

Low Equity Premium:

  • 80.01% – 85% LVR: 0.35% of loan amount p.a.
  • 85.01% – 90% LVR: 0.75% p.a.
  • 90.01% – 95% LVR: 1% p.a.
  • Over 95.01% LVR: 1.15% p.a.

Special fixed 1-year rate: 2.85% p.a. (Minimum 20% equity)

Standard fixed 1-year rate: 3.35%

Low Equity Premium:

  • 80.01% – 85% LVR: 0.3% of loan amount p.a.
  • 85.01% – 90% LVR: 0.75% p.a.
  • 90.01% – 95% LVR: 1.3% p.a.
  • Over 95.01% LVR: 1.5% p.a.

Special fixed 1-year rate: 2.79% p.a. (Minimum 20% equity)

Standard fixed 1-year rate: 4.15% p.a.

Low Equity Premium: 0.25% – 1.5% p.a. depending on size of deposit


As you can see from the above figures, if you’ve less than a 10% deposit, you could end up paying a lot more than a bank’s special rate. For example, at the BNZ, your interest rate could be as high as 4.75% – nearly 2 percentage points higher than their attention-grabbing special fixed 1-year rate of 2.79%


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Over at the ANZ and Kiwibank, the low equity premium is charged as a one-off fee, which can be added onto your loan. While both charge the same rate for those with an LVR of between 80.01% – 85% (0.25% of loan amount), as you can see below for those with less than a 10% deposit, the difference in fee is quite substantial.

Special fixed 1-year rate: 2.79% p.a. (Minimum 20% equity)

Standard fixed 1-year rate: 3.29% p.a.

Low Equity Premium:

  • 80.01% – 85% LVR: 0.25% of loan amount
  • 85.01% – 90% LVR: 0.75%
  • Over 90.01% LVR: 2%

Kiwibank wins Canstar 2017 Award

Special fixed 1-year rate: 2.65% p.a. (Minimum 20% equity)

Standard fixed 1-year rate: 3.4% p.a.

Low Equity Premium:

  • 80.01% – 85% LVR: 0.25% of loan amount
  • 85.01% – 90% LVR: 0.5%
  • Over 90.01% – 95% LVR: 0.8%

Not all bad news

Yes, if you’ve less than a 20% deposit, it’s likely you’ll have to pay more for your mortgage, but it isn’t all bad news. Due to the way that ongoing LEPs are calculated, as you pay off your loan and, hopefully your property rises in value, your LEP should diminish as your equity in your home rises. For a more detailed case study, check out our story: Low Deposit Home Loans Come With A Costly Catch.

To ensure that you’re not out of pocket, you’ll need to keep a close eye on house prices in your area and the size of your debt. Banks won’t actively revise the LEP that you’re paying, unless you contact them and ask for a re-evaluation of the price of your home and your equity in it.

Ultimately, it pays to shop around. If you’ve a stable income and a good savings history, you could be able to negotiate a great deal even without a 20% deposit.

To help you find the right mortgage, Canstar compares lenders and interest rates. In the table below, you can see a snapshot of the current floating rate home loans available in the market plus their LVRs, sorted by current rate (lowest to highest). Please note that this table is generated based on a $350,000 loan in Auckland for a first home buyer. If you’re interested in comparing for other regions, or loan amounts, check out the links and button below.

For our five-star home loan awards click here, or to compare rates hit the button:

Compare home loan rates for free with Canstar!

 

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