What are Low Equity Margins/Low Equity Premiums?
When you get a home loan at more that 80% Loan to value ratio (Find out more about LVR's here) the banks charge you a bit extra for the privilege of borrowing that money when you have a smaller deposit. Not that nice of them but the reality currently!
The banks do this in one of two ways:
- A low equity margin
- A low equity premium
Low Equity Margin
This is an additional percentage added to your interest rate that stays added until you get your loan to value ratio to below 80%. For most banks, this margin is around 0.75% additional. That means if the bank you are with is offering 2.29% for 12 months as an interest rate and your loan to value ratio is at 90%, you can expect interest rates of 3.05%, still good but higher than if you were at 80% LVR.
Generally the closer you are to 80%, the lower the LEM will be. Under 85% LVR, your LEM will be 0.3%.
Low Equity Premium
ANZ chooses to do their fee a little differently. They charge their fee as a one off cost based on the size of the loan and then add a smaller margin to the ongoing interest rates. This one off fee is usually around 0.75% of the entire loan ($3750 on $500K lending) and then 0.5% margin added to your interest rates.
How do you get the low equity margin removed?
We need to prove to the bank that the amount left on your loan is less than 80% of the value of your property. There might be a few ways this has happened (or a combination of them) since you first purchased the property:
- You have paid your loan down
- Your property has naturally gone up in value in capital gains
- You've added value to your property with renovations
The way we evidence this to your bank is by getting a valuation showing the new value of the property. Initially we can look at things like www.homes.co.nz, www.oneroof.co.nz and other such online databases. If that is looking about right, we can then go to the bank and check what value they have for your property. We will know what we need this number to be and so if the bank comes back with a number that is lower than what we think the value should be, we can then make the decision to pay for a registered valuation completed to prove the value of your property. We will order this valuation for you through the banks specific systems and there will be cost associated.
As soon as we can agree on a value of the property with a bank, they will remove those low equity margins within a few days.
We would always suggest you keep your repayments at the same amount and be using the additional funds on the loans to be paying off more principal from your loan.
Example
You originally buy your house for $500K and you have a deposit of $55K from your KiwiSaver and some savings. This means you have a loan of $445K initially and so your LVR (loan to value ratio) is 89%. The bank adds a Low Equity Margin onto your interest rate so instead of getting 3% for 12 months at the time for your fixed rate, you get 3.75%. This means your weekly repayments would be $475/week.
After 8 months, you have paid down $4K of principal and you've repainted and redone the gardens out of your own funds meaning the property is looking much better. Also, the property market has gone crazy and you think your property is worth at least $550K based on what is selling around you currently and potentially even more.
You get My Mortgage to check in with your bank and we find they have it valued at $557K. This means your LVR is now at 79% and so the low equity margin can be removed, meaning your minimum repayments drop to $433 meaning, with no change at all, you are paying off an extra $42/week from your loan. That's great. And to make it even better, interest rates have come down to 2.6% and so when your 12 month fixed term is up, we can get you fixed lower, keep your repayments the same and save you another $16/week meaning more principal being paid off.
If you have a low equity margin added to your fixed rates and you think they shouldn't be there anymore, touch base with My Mortgage and let us help get them removed and you onto a lower rate. The banks wont likely let you know so you need to stay on top of it and we can help.