Disclaimer:
The information on this website is for general guidance only and does not constitute financial or investment advice. Always do your own research and seek personalised advice from a qualified financial adviser or mortgage adviser before making financial decisions. All investments carry risk and past performance is not indicative of future results.
Key Takeaways
- LEMs are ongoing rate loadings for low deposits.
- LEPs or LMI are one-off fees for higher risk lending.
- Low-equity costs may reduce or be removed once your lender confirms you have enough equity.
- Compare lenders because charges vary.
- Building equity can improve your position, but removal of low-equity costs depends on lender policy, valuation and your loan details.
Purchasing your first home is an exciting milestone, but it comes with its share of financial considerations. If your deposit is less than 20% of the property's value, lenders may impose additional costs known as Low Equity Margins (LEMs) or Low Equity Premiums (LEPs). These charges are designed to mitigate the higher risk associated with low-deposit lending. Let's delve into what these terms mean and how they can impact your mortgage.
What is a Low Equity Margin (LEM)?
A Low Equity Margin is an additional interest-rate loading a lender may add when your deposit or equity is below the lender's standard threshold, often around the 80% LVR point for owner-occupier lending. The margin is lender risk pricing, and the exact amount depends on the lender's current policy and your Loan-to-Value Ratio (LVR).
LEM Ranges
Banks and lenders apply low-equity pricing differently, and published tiers can change. Treat any percentage as lender-specific rather than a market-wide rule.
- RBNZ LVR rules classify owner-occupier loans above 80% LVR as high-LVR lending.
- RBNZ currently allows banks to make only a limited share of new owner-occupier lending above 80% LVR.
- Your lender may charge a low-equity margin, a one-off premium, or First Home Loan LMI depending on the product and lender policy.
Note: low-equity pricing varies by lender and can change. Check the lender's current terms before relying on any example.
This additional margin may remain in place until the lender is satisfied your LVR has improved enough, often through repayments, a higher property valuation, or both. Removal is not automatic; lenders may require a valuation and will apply their own policy.
What is Lenders Mortgage Insurance (LMI)?
Lenders Mortgage Insurance (LMI) is a fee that protects the lender when you buy a home with a small deposit. It doesn't protect you as the buyer, but it allows banks and lenders to offer loans with less than a 20% deposit.
For most banks, this cost shows up as either a Low Equity Margin (an extra interest rate loading) or a Low Equity Premium (a one-off fee based on your deposit size).
With First Home Loans through Kāinga Ora, it works differently. Kāinga Ora says eligible borrowers need at least a 5% deposit and must pay a 1.2% Lender's Mortgage Insurance premium, which can be paid upfront or added to the loan. Lenders still apply their own credit criteria.
Example: On a $500,000 First Home Loan, the LMI would be $6,000.
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Ways Low-Equity Costs May Be Reduced or Avoided
A Larger Deposit
A larger deposit may help you stay at or below 80% LVR, which can reduce the chance of low-equity pricing. Some first-home buyers may still use lower-deposit pathways if they meet lender and product criteria.
KiwiSaver First-Home Withdrawal
Some first-home buyers may be able to use a KiwiSaver first-home withdrawal if they have been a member for at least three years, intend to live in the property, and leave at least $1,000 in their KiwiSaver account. Check with your scheme provider before relying on it for deposit funds.
Family Assistance
Gifts or loans from family members can sometimes form part of a deposit. Lenders usually need to understand whether the money is a genuine gift or a repayable loan, and legal/documentation requirements can matter.
Lower Purchase Price
A lower purchase price can reduce the amount you need to borrow and may improve your LVR, provided the property still meets lender, insurance and personal-suitability requirements.
Equity After Purchase
After purchase, equity can improve through repayments or a higher property valuation. Renovations may add value in some cases, but costs, consents, market conditions and lender valuation policy all affect whether they help remove low-equity pricing.
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