What you need to know about low equity fees

With so many factors to consider when taking out a home loan, it’s not uncommon for people to not fully understand what low equity fees are and why they exist.

Where mortgage protection insurance protects you - the borrower - in the event circumstances prevent you from being able to repay your loan, such as an accident, illness or unemployment, low equity fees is a form of insurance that protects the lender.

Why do low equity fees exist?

A mortgage is usually the largest sum of money a person will borrow and when a lender agrees to loan that money, there is a risk that the customer will be unable to pay the loan back. Although the property that is purchased is used as security, if we see a downturn in the property market that security may not be enough to cover what’s owing on the home loan when the lender sells it.

When does a customer need to pay the fees?

If a buyer has to borrow more than 80 per cent of the property purchase price, their lender will charge them either a low equity fee or a margin. This is used as a guard against the risk of the property being sold at a price less than the loan amount in the event of foreclosure.

With this protection, it means that lenders can accept a smaller deposit and means that more people can achieve their property goals.

How does it work?

A low equity fee is a one-off charge which can be added to the balance of a home loan so that a borrower doesn’t have to cover the cost up front.

A low equity margin is added to the mortgage rate until the borrower has gathered enough equity in their property. If a customer is able to pay off their home loan quickly or add value to the property through renovation, a margin can be much more cost effective than the one-off fee.

What does it cost?

The cost of low equity fees vary for every customer and is determined by factors such as how much money is borrowed and the size of the deposit.

How is it applied to a customer?

It will be determined in the loan approval process whether or not a borrower needs to pay low equity fees. First of all, it’s important to ensure a customer can afford the loan repayments and once the loan is approved, all documentation and information on low equity fees will be provided to the borrower.