Understanding Low Equity Margins and Premiums in New Zealand​

Written By Dustin Lindale

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 percentage added to your mortgage when your deposit is below 20%. This margin compensates the lender for the increased risk of lending to borrowers with lower equity. The exact margin varies depending on your Loan-to-Value Ratio (LVR):​

LEM Ranges

All banks have slightly different ways that they apply LEMs and they are subject to change. However, the following is a guide:

  • 80.01% - 85% = 0.25% - 0.35%

  • 85.01% - 90% = 0.75%

  • 90.01%+ = 1.00%+

Note: Rates vary by lender; always check with your bank for specific figures.​

This additional margin remains in place until your equity reaches 20%, either through loan repayments or an increase in property value. Once you achieve this, you can request the removal of the LEM, often requiring a property valuation to confirm your equity position.​

What is a Low Equity Premium (LEP)?

Unlike LEMs, a Low Equity Premium is a one-off fee charged at the beginning of your loan. This fee is typically a percentage of your total loan amount and can be added to your mortgage balance. Here's how it might look:​

  • 80.01% - 85% = 0.25%

  • 85.01% - 90% = 0.75%

  • Over 90% = 2.00%

Note: These percentages are indicative; actual rates depend on the lender.​

For example, if you're borrowing $500,000 with an LVR of 90%, a 0.75% LEP would amount to a $3,750 fee. This fee is non-refundable and doesn't decrease over time, unlike LEMs.​

LEM vs. LEP: Which is Better?

Choosing between a LEM and a LEP depends on your financial situation and how quickly you anticipate reaching 20% equity.​

  • LEM Pros: If you plan to pay down your mortgage quickly or expect your property's value to rise, a LEM might be more cost-effective in the long run.​

  • LEP Pros: If you prefer to know your costs upfront and avoid higher ongoing interest rates, a LEP provides that certainty.​

It's essential to calculate the total cost of each option over your expected loan term to determine which is more economical for you.​

Strategies to Minimise or Avoid LEMs and LEPs

  1. Increase Your Deposit: Saving more before purchasing can help you reach the 20% threshold, avoiding these additional costs altogether.​

  2. Utilise KiwiSaver: First home buyers may be eligible to withdraw from their KiwiSaver.

  3. Consider Family Assistance: Gifts or loans from family members can supplement your deposit, but ensure any arrangements are legally documented.​

  4. Opt for Less Expensive Properties: Choosing a more affordable home can reduce the amount you need to borrow, potentially lowering your LVR.​

  5. Renovate to Increase Value: Improving your property's value through renovations can help you reach 20% equity faster, allowing for the removal of LEMs.

Need Advice On The First Home Buying Process?

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Dustin Lindale
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