Understanding Low Equity Margins in New Zealand
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 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. From 1 July 2025, all new First Home Loans have a flat insurance premium of 1.2% of the loan amount. This can be paid upfront or added to your mortgage.
Example: On a $500,000 First Home Loan, the LMI would be $6,000.
Strategies to Minimise or Avoid LEMs and LMI
Increase Your Deposit: Saving more before purchasing can help you reach the 20% threshold, avoiding these additional costs altogether.
Utilise KiwiSaver: First home buyers may be eligible to withdraw from their KiwiSaver.
Consider Family Assistance: Gifts or loans from family members can supplement your deposit, but ensure any arrangements are legally documented.
Opt for Less Expensive Properties: Choosing a more affordable home can reduce the amount you need to borrow, potentially lowering your LVR.
Renovate to Increase Value: Once you own your first home, improving your property's value through renovations can help you reach 20% equity faster, allowing for the removal of LEMs.
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