What is a low-equity premium, and how can it affect your loan?
A low-equity premium (or LEP) is a special fee a lender charges when you have a smaller deposit (usually anything less than the standard 20%).
Lenders charge this additional fee because of the extra risk they take on when offering the loan. Since you are borrowing a higher portion of the home's value, the lender faces a bigger risk if you are unable to make repayments. This premium helps to compensate for some of that additional risk.
A low-equity premium is generally added to your interest rate, so you pay slightly more than the typical lending rates. A small number of lenders charge the LEP as a one-off fee. Both of these options mean you’ll end up paying more interest in the long run, which can add up significantly over time.
How the premium works
The low-equity premium remains added to your interest rate and repayments until your equity has grown to at least 20%. Because lenders don't always monitor this automatically, it is a good idea to keep an eye on your repayments and growing equity. You can then request a re-evaluation of the home's value and your equity position.
It’s important to note that every lender has a different low-equity margin and different criteria for how they assess them. Depending on your situation, you might find that:
- Some financing options might allow you to avoid the LEP entirely, even if you are under the 20% mark.
- Some lenders don’t charge a LEP as such, but will offer special interest rates to those with over 20% equity instead, and the non-discounted rates to those with less than 20%.
- There are also some first-home buyer programs that cater directly to those with smaller deposits and therefore don’t include the low equity premium.
How we can help
This is where working with a mortgage adviser comes in handy. We know which lenders and options are suitable for low-deposit borrowers and can compare the difference in premiums and criteria between lenders. This allows us to find the right solution for you, rather than just applying to one bank and hoping for the best.
Since the LEP can add a significant amount to your loan over the years, it is important to ensure it is the least possible amount. We help you stay on top of your home's equity and valuation status, and create a strategy to get the loan repaid as quickly as possible to open up more competitive rates. These are all things the team at Loan Market Queenstown can help with.
If you are looking to buy a home with a lower deposit, then get in touch with our mortgage advisers to book an obligation-free appointment. Let’s chat about how we can help to get you on the property ladder sooner with the right lending solution for you.