Low equity loans get more expensive

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[UPDATED corrects, adds comment] Loan-to-value ratio speed limits will not be introduced until the end of the month but the divide between borrowing costs for low-deposit borrowers and those with higher levels of equity is already starting to grow.

Tuesday, September 3rd 2013, 10:18PM 2 Comments

by Susan Edmunds

It is a move that was first predicted several months ago by commentators, who said that those with bigger deposits would likely be able to negotiate bigger discounts on carded interest rates.

Several major banks have hiked their low-equity fees ahead of new loan-to-value ratio (LVR) speed limits. Banks will have to reduce their borrowing to low-deposit borrowers to less than 10% of their total loan books.

ANZ has announced new low-equity fees for borrowers, ranging from an extra 0.25% for borrowers with an LVR of 80% to 85%, and 0.75% for borrowers with a 10% to 15% deposit, to 2%  for borrowers with a deposit of less than 10%.

The bank describes the fee as a low-equity premium but it is charged as a one-off fee.

Westpac introduced a 0.25% margin earlier this year on loans between 80% and 85% LVR, and at the end of last month BNZ introduced margins of 0.35% for loans between 80% and 85%, 0.75% for loans between 85.01% and 90%, 1% for loans between 90.1% and 95% and 1.15% above 95%.

Kiwibank – previously the highest low-equity fees in the market - has dropped its fees but that is because it has moved to insure its own low-deposit loans.

Westpac chief economist Dominick Stephens has been saying since LVR speed limits were first mooted that they would likely make borrowing dearer for low-equity borrowers, and cheaper for those with more money behind them because banks would have more of an appetite for sub-80% loans.

He said it would result in a “partitioning” of the market that would particularly benefit investors.

“Investors typically have more than 20% equity so they will face a lower interest rate than otherwise and probably face more demand for rental properties from people who are in the rental market because they are not able to buy. Conditions for investors may actually get better. The pace of house price growth may slow a bit, but not much.”

But broker John Bolton, of Squirrel, said while the new fees might make borrowers think about saving a larger deposit, many would not end up paying the full fee. "I think the fee will be eroded through competition with other lenders on high quality deals."

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