What is a low equity margin charged by banks on low deposit mortgages?
If you have less than a 20% deposit you may be charged a low equity margin by your lender. But what is it for? and why are there fees for various deposit sizes?
In recent times there has been a flurry of media fuelling the belief by many that you cannot purchase a new home with less than 20% deposit. As we have noted in earlier articles (view here) this is incorrect and it is possible to purchase a property with a lesser deposit, however there are potential costs to doing this.
Banks and lenders can charge a variety of fees or apply margins on interest rates to cover what they deem is a higher risk loan, due to the lower level of equity in the home.
I know what you will be thinking….. ‘those greedy banks’...... to an extent you would have a point, however this isn't simply banks profiteering off the hardship of first home buyers. NZ banking regulations and financial common sense both play a significant part in why banks charge a higher price for lending in areas they deem riskier and low deposit mortgages fall into this category.
What has raised the eyebrows of some in the industry is not the fact the fee’s exist but that they are often poorly explained and hidden in fine print which means limited transparency for the customer and makes comparing between lenders difficult.
When making such a large borrowing decision it’s important to have all the information clearly laid out for careful analysis to allow the best decisions to be made.
As these low equity fees and premiums/margins vary between banks and lenders getting the right advice when looking at a low equity mortgage is important. The difference can often be $1000’s of dollars and can add up significantly over the life of the mortgage.
Mortgage Advisers have the potential to ensure the LEM (Low Equity Margins) are never implemented in certain circumstances. If you refer back to our blog posted about ‘Finding the Right home Loan for you when Building’ we highlighted how different lenders view increased equity in valuations when building so by placing you with the right lender at the right time your LEM could be drastically reduced or never implemented.
A mortgage adviser can help, they know the fees and margins for all lenders and also what the other relevant lending criteria are, which enables them to match you with the best possible mortgage for your personal circumstances and ensure you are not paying any more than you need to. They can also help position your application strongly and advocate on your behalf for a competitive deal.
To find out everything you need to know about buying your first home, make sure you get along to our First Home Buyers evening in Wanaka on October 30th from 5.30-7pm. Tickets are free so grab yours here!