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
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.
| Loan-to-value ratio (LVR) | |
| 80.01% to 85.00% | 0.30% p.a. |
| 85.01% to 90.00% | 0.75% p.a. |
| 90.01% to 95.00% | 1.30% p.a. |
| >95.01% | 1.50% p.a. |
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.
*This article was first published in our email for paying subscribers early on Tuesday morning. See here for more details and how to subscribe.
25 Comments
It costs about $1k each time to get a valuer through so there's no efficient way to mark to market. It would be nonsense otherwise - "hey, properties in your area seem to be down in value based on possibly misleading median sales data combined with our own AI, so we're going to slap you with higher loan payments this month, LOL you should buy shares in a bank."
The uplift of all properties in a tiny town shouldn't change the council's rates funding requirement.
Your rates would've gone up 20.8% because the council decided they needed a 20.8% rates increase, and it would've gone up that amount if property values had fallen.
Nope. The average rates rise across the whole of New Plymouth District was just over 12%. It was a complete mess.
https://www.stuff.co.nz/taranaki-daily-news/news/132693427/the-highs-an…
Residents in some of New Plymouth’s most affluent suburbs have seen their rates drop significantly while those living in poorer neighbourhoods have been hit with increases far exceeding the forecast average.
Homeowners sitting on valuable properties in the likes of Brooklands, Fitzroy, Strandon and Welbourn had also seen rate increases well below the average, while residents in less affluent suburbs like Blagdon, Spotswood and Westown were set to pay more than the 12.4% average.
The news was even worse for residents outside of New Plymouth, with some homeowners in Inglewood, Okato, Oakura and Urenui facing a jump well in excess of 20%
https://www.stuff.co.nz/taranaki-daily-news/news/132276744/new-plymouth…
While the proposed rates increases for residential, commercial, farmland and small holdings were signalled during an extraordinary council meeting in March, new land valuations from Quotable Value, which were six months late being delivered, has changed the share of rates for thousands of properties.
Overall, 39% of property owners face an increase of between 15%and 30%, 1754 property owners face a hike of between 30% and 50%, while 435 property owners are looking at an increase of between 50% and 100%.
Not how it works. If one particular suburb in a Council area appreciates in value greater than the average appreciation of value across the entire District, homeowners in that suburb will have to take a greater share of the rates burden, so their rates will increase by more than the average increase. Values are used to apportion rates between owners - the higher your valuation, the greater your share of the rates burden.
Easy answer. Scrap Low Equity Loans altogether. A loan is a loan is a loan. If the RBNZ regs state, say "Minimum 20% Deposit required of the Purchase Price for a sole home and 50% on any secondary one", then that's it. It's up to the lenders to assess future movements before it agrees to the loan.
Let the loan risk lie where it should - with the Lender, as any loan does.
If the idea of Low Equity Loans is to benefit the First Time/Sole Home buyer, then do it from bottom up, not top down.
I agree, we shouldn't allow lending mechanisms so FHB feel they can buy into this way over valued and heated market. Eg Withdraw KiwiSaver, Low equity loans, and now trying to push for Shared equity or Lease hold agreements. The bottom line is prices need to drop, but I guess that's a hard sell to the ones that run and own NZ - the Banks.
The media that was filled with property and mortgage lending advertising? (even this site 2015-2020 was filled with property related advertising which I mentioned at the time) - how can organisations provide unbiased reporting on certain topics when their income is paid for by those who benefit from positive reporting only?
(not a dig at you interest.co.nz but certainly towards MSM)
How about nearly 40% decrease to get you started?
Lifestyle property sells for $1.4m in mortgagee auction | Waikato Times
Good things take time. Just be patient.
What is Value, anyway?
It's what the next buyer CAN pay for whatever it is you have, be that a property or a share.
Change that equation, and it's easy, and most of the issues with our Debt soaked, 'unaffordable' property market evaporate. Investors would return to Net Yield again, and not be wholly reliant on Capital Gains for their investment decision.
The Property Ladder. That phrase is the problem in three words.
There isn't supposed to be a Property Ladder, yet it's bandied about here, there and everywhere to the extent that everyone assumes it as a fundamental factor of Life. It isn't.
What Life is supposed to be about is The Career Ladder; the better educated you are, the harder you work etc. the more you get paid which then allows you to buy a home or the next better home. But we've swapped the two and made Property the primary way to 'make a living' rather than productive work.
Yes a pretty good sign that you’re living in an unsustainable speculative environment - risk factor = high
(that is when peoples houses were generating more capital gain (income if you like..) than they were from production of goods and services in the economy - this is never a good sign of a healthy nation - it is one that is living on borrowed time/money)
Dropping rates again risks making our predicament even worse downtrack - we need people to use lower rates to pay down the existing private debt - not to use it to leverage up with even more debt/risk.
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