Banks typically charge low equity fees for borrowers with deposits below 20%. Are these reapplied if equity rises above 20% and then drops back below 20%?

When a borrower takes out a home loan with a deposit of less than 20% of the purchase price, banks typically apply an additional charge known as a low equity margin or low equity premium.

A reader asks interest.co.nz an interesting question about these fees. 

This reader took out a mortgage to buy a property in mid-2021 with an 18% deposit. Their bank thus charged a low equity margin for six months before it was removed. Since then the home value has risen and now dropped back. This means the borrower, even with slightly reduced principal is back at 18% equity in the property, thus has a loan-to-value ratio of more than 80%.

So, with the mortgage up for renewal, will their bank reapply a low equity margin? Does the borrower have scope to seek a mortgage rate below their bank's carded, or advertised, rates?  And what might happen in terms of a low equity margin, or premium, if they look to shift their mortgage to another bank?

It's worth noting Real Estate Institute of New Zealand data put the national median house price at $770,000 in June, down $155,000, or 17%, from its November 2021 peak of $925,000. The low interest rate 2020-2021 period saw banks shovelling loans out the door, with the value of new mortgages taken out during that period reaching an annual rate of about $100 billion.

Interest.co.nz put our reader's questions to the big five banks. Here's what they said.

ANZ

1. In this scenario does ANZ reapply the low equity margin/premium?

No – we don’t reapply the low equity premium. We’d only do this if the customer wanted to borrow more from us at the same time.

2. Would a borrower in this position who was refixing be able to get a rate below ANZ's carded rates?

Without knowing the exact customer situation, we can’t give a specific answer to this one.

However, more broadly. If, according to the original valuation (or a more recent valuation if property values have improved), a customer had at least 20% equity (LVR below 80%) in the property, then they get special rates. Otherwise, standard rates.

3. If a borrower who was a customer of another bank who was in this position was looking to move to and refix with ANZ, would ANZ apply a low equity margin/premium?

If a customer moving from another bank had an LVR over 80%, then yes, we apply a low equity premium (LEP), and the customer will be eligible for standard interest rates.

And;

When refixing a home loan, unless a customer is looking to borrow more, the bank generally looks at both the valuation at the last credit event (usually an application or top up) and a digital valuation to determine if by either valuation, the customer has at least 20% equity according to that valuation. If they do, then they’ll generally receive our special rates automatically. Customers in this situation would not be required to pay a low equity premium.

The relationship doesn’t end once people have purchased a home, and we encourage any customers who have concerns, or who want to take the opportunity to talk about their finances, to contact us early.

We are here to support our customers, and depending on their circumstances, there are several options we can explore to ensure we support them in a way that best suits their needs.

Special interest rates are available for customers with more than 20% equity. If a customer is applying for new lending (including if they were refinancing from another provider) and had a loan- to-value ratio over 80% then ANZ will apply a low equity premium and the customer will be eligible for standard interest rates. In most cases, this can be capitalised to the loan. 

ASB

We will only apply a low equity margin on new home lending where the loan-to-value ratio is higher than 80%, based on the current property value. This would not be applied to an existing loan simply due to a change in property valuation. 

In 2020 we moved to a single rate card which allows customers to access lower rates, irrespective of their equity levels.

BNZ

In the scenario described, BNZ would not apply a low equity margin/premium. We use the property value from the time of purchase (in this case, 2021) to determine equity, not the current market value.

A borrower in this position who is refixing may be eligible for a rate below BNZ's advertised rates. We encourage customers to speak with us about their individual circumstances when refixing. 

For new customers looking to move their mortgage to BNZ, we assess the equity position based on the balance they're looking to refinance and the current valuation of their property. If the equity position is less than 20%, we may apply a low equity premium. However, each case is evaluated individually. 

We always recommend that customers discuss their specific situations with us directly to explore the best options available to them.

Kiwibank

We do things a bit differently from some of the other banks, so below is an explanation of how it works and how it would apply the situation you asked about. 

To provide a bit of context, at Kiwibank we have two rate cards. Customers with 20% equity have access to our ‘special’ rate card and customers with less than 20% equity use our ‘standard’ rate card. We don’t add low equity premiums or low equity fees in addition to the ‘standard’ rate card. Typically, interest rates on our standard rate card are 0.8% to 0.9%* higher than the special rate card. 

If a customer draws a new loan with Kiwibank, their LVR position is calculated at the time of application to determine the interest rate card for which they are eligible. When the loan is fixed, the interest rate remains the same for the duration of the fixed term. When the loan is due to refix, the LVR position is recalculated to determine whether the customer has 20% equity or not and the applicable rate. There are two common ways for a low equity customer to increase their equity. One is by making repayments that reduce the loan balance, the other is through increases in the value of the property.

Our property valuation remains the same until the next credit event. When it comes time to refix we will look at the valuation we hold on file for the property and on request we can compare the current valuation provided by our valuation provider, Valocity, and we will use the higher of the two. As such, in the scenario provided, the customer would have more than the 18% equity due to their “slightly” reduced principle. If they have managed to repay the 2% to take them to 20% equity, they will receive our ‘special’ rate card. If they don’t have 20% equity, they will be subject to our standard rates.

*Currently, interest rates on our standard rate card are 0.9% to 1%  higher than the special rate card. However, we have just sent out a notification about rate changes coming into effect from Monday [July 22], which will the difference in standard and special rate cards drop.

Westpac

Existing Westpac home loan customers whose equity drops below 20% due to a fall in the value of their home won’t have a low equity margin re-applied, and are still eligible for special rates when they refix their loan. However, a customer re-financing to Westpac from another bank with less than 20% equity may have to pay a low equity margin and may not be eligible for special home loan rates.

We encourage home loan customers to contact us if they have questions or concerns about any aspect of their finances.

What are the actual low equity margin/premiums?

Below is detail from the individual banks on the actual low equity margins/premiums they charge.

ANZ

A low equity premium may apply where a loan amounts to over 80% of the property's value. We'll need a registered valuer's report for lending over 80% of the property's value.

• 80.01 - 85.00% loan to value ratio - 0.25% of loan amount
• 85.01 - 90.00% loan to value ratio - 0.75% of loan amount
• Over 90.01% loan to value ratio - 2.00% of loan amount

ASB

For loans with less than 20% equity a low equity margin (LEM) may apply.

An LEM is an additional interest amount that is added to your interest rate, it applies when you borrow more than 80% of your property's value. The actual LEM charged depends on the loan to value ratio (LVR) which is calculated as total borrowings divided by the total value of the security property. The LEM for each LVR band is set out in the table below.

At any time six months after the date of initial drawdown you may request a reduction or removal, as the case may be, of the low equity margin applicable to a facility. We can choose whether or not to approve your request. We will determine such request on the basis of your applicable LVR at the date of such request. To make such determination we may require you to provide us with a current registered valuation of the relevant property or properties at your expense.

We will periodically review your low equity margin against your LVR to ensure it is still applicable to your facility. We may change your low equity margin to a lower margin in accordance with our low equity margin bands or remove the low equity margin entirely if it no longer applies based on your LVR.

We will notify you in writing of any change to, or removal of, your low equity margin as the case may be.

BNZ

A low equity interest rate premium will apply to all loans with less than 20% equity (more than 80% loan-to-value ratio).  

If you have:

• between 80.01% – 85% LVR you’ll pay a premium of 0.35% p.a.
• between 85.01% – 90% you’ll pay 0.75% p.a.
• between 90.01% – 95% you’ll pay 1.00% p.a.
• over 95.01% you’ll pay 1.15% p.a.

Westpac

When you take out a home loan and your deposit is less than 20% of the property's value, a low equity margin (LEM) applies. This is a percentage amount, typically between 0.25% and 1.5% per annum, that is added to the interest rate on your home loan. It reflects the extra risk involved to the lender. This margin stays in place for as long as you have less than 20% equity in your home.

In time, the equity in your property will increase above 20%. This will happen when you've paid off some of the loan, your property's value has risen or a combination of the two.

To check if you still need to pay the low equity margin:

• You may choose to pay for a re-valuation of your property if you think the value has increased
• You can also subtract the value of your home loan from the value of your property, then divide this by the total value of your property. Multiply the answer by 100.

For example:

Take the total value of the property: $850,000

Minus the total value of the home loan: $620,000

Divide $230,000 by the total value of the property: $850,000

The equity in this home is: 27%.

If you are borrowing less than 80% of your property’s total value, which means you have more than 20% equity, you might not need to pay the low equity margin. You should get in touch with us so we can arrange a review.

What to expect: 

• At your review, you'll need the latest valuation report for your property. In some cases, we can get these for you at no cost to you. Talk to us to see what valuation report would be required
• Once we confirm that your equity is more than 20% of the property's value, the low equity margin could be removed
• If you're on a floating rate, the margin will be removed immediately (provided it has been in place at least six months)
• If you're on a fixed rate, the margin will be removed the day after the end of the fixed rate term.

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