The lowdown on low equity premiums

As banks increase their interest rates in line with the Reserve Bank Official Cash Rate, homeowners with less than a 20 percent deposit should keep in mind what low equity premiums could mean for their mortgage repayments.

While each bank has a slightly different approach to their low equity premiums (also known as low equity fees or margins), they are an additional margin charged to mortgage applicants who have less than a 20 percent deposit on their property.

Low equity premiums are essentially a bank’s insurance, protecting it if a borrower defaults on their loan and the property must be sold at a price less than the loan amount.

At the end of 2021 the Reserve Bank tightened rules around low equity lending, limiting the number of loans banks can give out to low equity applicants. The restrictions mean only 10 percent of a bank’s total lending can be to borrowers who have less than 20 percent equity.

Low equity premium rates vary depending on the bank, but they are usually in the range of 0.25 to 0.3 percent for a borrower with a 15 percent deposit and up to 0.75 percent for borrowers with only a 10 percent deposit.

It may not seem like a lot but over the life of a mortgage it can have significant impact.

As an example, if you wanted to buy an $800,000 home but only had a 10 percent deposit you would need to borrow $720,000. Adding the low equity premium could see your interest rate rise to around 5 percent. You would need to pay down the loan to $640,000 to remove the low equity premium and this would take around 6.5 years of paying the low equity premium.

A good way to work out what a low equity premium could mean for you is to use the mortgage calculator on our website.

With many homeowners’ mortgages about to roll off fixed terms, it’s also worth checking whether a low equity premium could or should still be added to your new interest rate.

If you took out a mortgage with a low equity premium included, you may find the value of your property has increased to a point the premium is no longer required. When banks offer new interest rates, they don’t always automatically remove the low equity premium, and it can be up to the customer to provide evidence themselves, such as a registered valuation.

This means the bank may still be pricing your interest rate with the low equity premium included.

With interest rates on the rise, homeowners should understand what rates they are paying on their loans, so they don’t end up paying more than they need to on their mortgage.

Get in touch with us and we can help you ensure you are receiving the best possible rates.

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