Low Deposit Home Loan: What are Low Equity Premiums?

Recent rule changes around mortgage lending to borrowers with small deposits means it’s easier to secure a low deposit loan. However, if you’ve only got a small deposit, it’s likely you’ll have to pay more for your mortgage in the form of a low equity premium (LEP). Canstar reveals what home buyers with low deposits need to know about LEPs.

Low deposit home loans and the LVRs

Banks will happily lend to home buyers who have at least a 20% deposit. However, lending to borrowers with smaller deposits are subject to the Reserve Bank of New Zealand’s (RBNZ) loan-to-value ratio (LVR) restrictions.

An LVR refers to the size of a loan compared to the value of the property it’s used to purchase. For example, if you buy a home worth $1 million with a $300,000 deposit and a $700,000 mortgage, this means 30% is coming from you, and 70% from the bank, which is an LVR of 70%.

Because low deposit mortgages come with greater risks for banks, the RBNZ sets limits on banks’ low deposit lending. Recently, however, the RBNZ increased the amount of low deposit lending banks are able to make.

From July 2024, banks will be able to grant:

• 20% of owner-occupier lending to borrowers with an LVR greater than 80% (up from 15%)
• 5% of investor lending to borrowers with an LVR greater than 70% (up from 65%)

Potentially, these changes will make it easier for those with smaller deposits to buy property. However, because borrowers with small deposits are considered a greater risk, banks usually charge them more for their mortgages.

Not only do borrowers with small deposits usually get charged higher interest rates, they often have to pay a low equity premium (LEP), too.

Low deposit home loans: what is a low equity premium?

A LEP represents extra interest, or an additional one-off charge, on top of a mortgage. Depending on the size of a borrower’s deposit and the lender, it can range from an extra 0.25% to 1.5% per annum, or a 2% premium on the amount of the loan.

Low deposit home loans: what low equity premiums do the banks charge?

For those with less than a 20% deposit, three of the four major banks charge LEPs as annual extra interest charges, which, as you can see, can add up to 1.5% p.a. to the rate charged.

(Figures correct as of 05/06/2024)

BNZ

The BNZ’s low equity premium:

• 80.01% – 85% LVR: 0.35% of loan amount p.a.
• 85.01% – 90% LVR: 0.75% p.a.
• 90.01% – 95% LVR: 1.00% p.a.
• Over 95.01% LVR: 1.15% p.a.

ASB

The ASB’s low equity premium:

• 80.01% – 85% LVR: 0.30% of loan amount p.a.
• 85.01% – 90% LVR: 0.75% p.a.
• 90.01% – 95% LVR: 1.30% p.a.
• Over 95.01% LVR: 1.50% p.a.

Westpac

Westpac charges a low equity premium of between 0.25% – 1.5% p.a. depending on deposit size.

Low equity fees vs low equity premiums

At ANZ, however, the low equity premium is charged as a one-off fee, which can be added onto your loan:

ANZ

The ANZ’s low equity fee:

• 80.01% – 85% LVR: 0.25% of loan amount
• 85.01% – 90% LVR: 0.75%
• Over 90.01% LVR: 2%

So if you’ve a low deposit, for every $100,000 you borrow at the ANZ, you could be charged between $250 (0.25%) and $2000 (2%).

Low deposit home loans: low equity premiums reduce over time

Yes, if you’ve less than a 20% deposit, it’s likely you’ll have to pay more for your mortgage. However, it’s worth noting that not all banks charge LEPs. Kiwibank, for example, doesn’t charge a low equity fee or premium. It offers special rates to customers with 20% equity, and standard rates (less than 20% equity), which are common across the market.

And even if you choose to go with a bank that charges an LEP, it isn’t all bad news. As you pay off your loan and your property (hopefully) rises in value, your equity in your home will rise. This means that the LEP you’re charged should diminish as a result.

However, banks don’t proactively revise your LEP unless you contact them and ask for a re-evaluation of the price of your home and your equity in it. So it pays to keep a close eye on house prices in your area and the size of your debt.

Ultimately, if you’re looking for the cheapest home loan, it pays to compare the different mortgage products on the market. And that’s something Canstar can help you with …

Cheapest Home Loan Rates for First Home Buyers

The table below displays some of the 1-year fixed-rate home loans on our database (some may have links to lenders’ websites) that are available for first home buyers. This table is sorted by current interest rates (lowest to highest), followed by company name (alphabetical). Products shown are principal and interest home loans available for a loan amount of $500K in Auckland. Before committing to a particular home loan product, check upfront with your lender and read the applicable loan documentation to confirm whether the terms of the loan meet your needs and repayment capacity. Use Canstar’s home loan selector to view a wider range of home loan products. Canstar may earn a fee for referrals.

Compare Cheapest Home Loan Rates for First Home Buyers

About the author of this page

This report was written by Canstar’s Editor, Bruce Pitchers. Bruce has three decades’ experience as a journalist and has worked for major media companies in the UK and Australasia, including ACP, Bauer Media Group, Fairfax, Pacific Magazines, News Corp and TVNZ. Prior to Canstar, he worked as a freelancer, including for The Australian Financial Review, the NZ Financial Markets Authority, and for real estate companies on both sides of the Tasman.