First home buyers with low deposits face a Catch-22. A 10% deposit gets many young New Zealanders onto the housing ladder. But they will pay higher interest rates or a one-off charge added to the mortgage.
With house prices rising steeply, and New Zealand’s average property value hitting $1 million, many buyers have no choice but to buy on a low deposit to get started in home-ownership.
Banks charge low equity fees because the lower a person’s deposit, the riskier the loan. The risk to the bank is that house prices fall and the buyer’s mortgage ends up being more than the value of the house.
That’s not a problem if the owner keeps paying the mortgage, but sudden changes in the market often come with other economic consequences – such as job losses - which can lead to mortgagee sales.
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One of the other downsides of having a low first home deposit is that as well as margins or premiums, you may also need a registered valuer’s report, which can cost upwards of $1000.
The real trick with these loans is that in a rising market buyers can remortgage or move quite quickly onto a standard interest rate. Not all do, perhaps because of apathy or a lack of knowledge.
At Westpac, for example, homeowners paying low equity margins can seek a review if the property has risen in value meaning they now have more than 20% of the equity in the property.
“We encourage homeowners to contact us and supply a registered valuation report, or government valuation, once they believe they have more than 20% equity,” says Westpac NZ Housing Lead Peter Brooking.
“Borrowers on floating rates will have the margin removed immediately, provided it has been in place for at least six months, while borrowers on fixed rates will have it removed when the fixed rate term matures.”
An independent mortgage adviser will typically review clients’ mortgages. iLender broker Jeff Royle says his company monitors clients who are subject to margins and premiums and advises customers when they might qualify for lower rates. “This usually requires a new valuation to confirm the LVR [loan to value ratio] plus of course there may be break fees in any current loan so it doesn't always pay,” he says.
Each bank has different terms and conditions.
ASB charges a “low equity margin” on loans of above 80% of the property’s value. In practice from 80.01% to 85% borrower’s pay 0.30% per annum above standard rates. It goes up in bands to a 1.5% premium on standard rates for loans over 95%.
The “low equity premium” at ANZ is 0.25% per annum on top of the interest rate for borrowing from 80.01% to 85%, 0.75% on top for borrowing 85.01% up to 90%, and over that 2% extra.
Westpac charges a low equity margin between 0.25% and 1.5% per annum
At Kiwibank the variable rate is the same whether you have above or below 20% equity. However fixed rates differ for low equity lending. For example a 1-year-fixed currently is 2.49% if you have more than 20% equity, but 3.34% for borrowers with less than 20%.
Kiwibank also offers the First Home Loan, a government-backed loan that allows some first home buyers to buy with just a 5% deposit. If you qualify, you’ll pay a First Home Loan – Lenders Mortgage Insurance fee of 1% that covers a charge from Kāinga Ora to insure each First Home Loan against default. You can choose to pay it upfront when you buy your first home or add it to your loan. For First Home Loans with less than 10% equity a 0.25% p.a. premium is also added to the special fixed interest rates.
Royle says fewer buyers will be able to get a low equity loan come October thanks to new rules under the Credit Contracts and Consumer Finance Act 2003 (CCCFA) and the Reserve Bank of New Zealand reducing the percentage of banks’ lending to low equity buyers.
Low equity borrowers sometimes have to go to second tier or alternative lenders, which also charge more for higher borrowing. Resimac, for example, charges 3.39% interest for loans under 70% LVR, and up to 4.09% for 80.01-90% LVR.
Squirrel, which is a bit different from many because it has access to money invested directly with it on a peer-to-peer platform, offers loans of up to 95%.
The first 80% is interest only and charged at a normal 30-year interest rate between 2.98% and 3.29% for one to three year fixes,. The second part of the loan is peer-to-peer funded, but the interest rate is 9.95% with principal and interest repayments over a five year term. That is an effective overall mortgage rate of 3.93%.
The Reserve Bank is currently considering changes to the LVR rules that will mean fewer first home buyers can access low deposit lending.
