Low-deposit home loans: how New Zealand banks charge more for less - Nadine Higgins

The smaller your deposit the higher your bank fees and interest rate margins will be. Photo / 123rf

THREE KEY FACTS:

• Borrowers with less than a 20% deposit face higher interest rates and fees from banks.
• Low-deposit lending is rising as the Reserve Bank loosens restrictions and house prices decline.
• To reduce costs, borrowers should aim to increase equity above 20% and negotiate with banks.

While borrowers are benefiting from falling interest rates, there is a small group who won’t benefit quite as much: those with less than a 20% deposit.

Low-deposit lending is inching up, according to the latest data, likely connected to the Reserve Bank loosening its restrictions on low-deposit lending, and first-home buyers attempting to strike while house prices are lower.

But securing lending with less than 20% as a deposit comes with a sting in its tail. You’re considered a greater lending risk, so banks reflect that in their pricing – that is, the interest rate you pay.

To a new borrower, it seems paradoxical (and likely infuriating) – “I’m stretching myself to afford a home, so you’re going to charge me more?!”

The banks’ differing policies can also seem like a minefield of differing terminology and rates.

For example, at Kiwibank you won’t be eligible for their “special” interest rates, only their “standard” ones, which are 0.8%-0.9% higher. At ANZ you pay the higher “standard” interest rate, plus you may also pay a low equity “fee”. At Westpac it’s similar to ANZ, except it’s a low equity “margin” tacked on to your interest rate, not a fee.

Both ASB and BNZ don’t differentiate between “standard” and “special” rates but charge you a margin on top of the applicable interest rate.

Whatever the mechanism the outcome is the same: you pay more. How much more depends on the individual bank, and the size of your deposit.

Let’s crunch some numbers so I can show you what I mean in dollar terms.

Say you are buying a $700,000 property and have a $119,000 deposit (phew, well done) so you’re borrowing $581,000. So that’s a 17% deposit.

Based on the rates available at the time of writing,

• At Kiwibank you could pay just over $5200 more per year than if you had a 20% deposit (the “standard” rate on the one-year is 0.9% higher than the “special”)
• At ANZ, it could be $4938.50 more (the “standard” one-year rate is 0.6% higher than the “special”, and the applicable low equity fee for a 17% deposit is 0.25%)
• At Westpac, it could be $4938.50 more (the scenario is similar to ANZ – a 0.6% differential between “special” and “standard” rates, but rather than a low equity fee you’d pay an interest rate margin of 0.25% on top of whatever fixed term you select)
• At BNZ it could be $2033.50 a year more (a 0.35% interest rate margin applies for a 17% deposit)
• At ASB you’d pay $1743 more in interest (a 0.3% interest rate margin applies)

On that basis it looks like you have a clear winner, right? If only it were that simple!

The fees and margins increase the smaller your deposit – the highest I could find was 2% if you have less than a 5% deposit, and again it differs by bank.

ANZ also confirmed to me this week that they’ve told advisers they can apply to have the low-equity fee waived. Other banks told me the margin isn’t negotiable, but the base interest rate can be.

Plus, if you’re buying a new build property, the numbers may change again. Brokers told me ANZ may discount their “standard” rates by 0.6% if you buy a new build with less than 20%. (so you’d only be paying the 0.25% margin)

But even if you apply your best negotiating skills, it’s likely you’ll pay more. Therefore, your priority should be getting that margin removed as quickly as possible.

There are two ways to achieve that – paying down extra debt to increase your equity above 20%, or your property increasing in value to the point where your equity rises above 20%.

But once you’ve reached that magic threshold, there’s another wee sting waiting: most banks will only remove your low-equity margin once you come off a fixed rate.

The exception is ASB, which will consider removing it once the numbers justify it, regardless of your fixed rates, which offers more flexibility, whereas Kiwibank will only do it at the next “credit event” (like restructuring your debt or borrowing more) which is less flexible.

Either way, it’s yet another thing to consider, and by now you’re likely on information overload, so here’s a wee checklist if you’re trying to buy with less than a 20% deposit:

• Do you have a choice of bank to go with? (For some it’s just a matter of whoever will offer them lending!)
• If so, which one offers the better deal for a buyer in your position based on the low-equity margins or fees they charge, the cashback they may offer, and their policy on removing the margin.
• Can you – or your broker – negotiate a better rate? For example, using the “special” rates, or reducing the margin.
• How soon are you expecting to be able to get to 20% equity, and what can you do to expedite that?
• Based on that answer, does fixing shorter or fixing longer make more sense (factoring in prevailing rates at the time, and the policy for removing the low equity margin at that bank).

It’s a massive achievement to make it onto New Zealand’s ultra-pricey housing market, but don’t rest on your laurels once you get there. Keep an eye on your loan-to-value ratio, and when you hit that 20% equity threshold, ask the bank to review your situation.

Your goal should be to pay a low equity margin or premium for the shortest amount of time possible – because your money is better used paying off your mortgage debt faster, rather than just paying more to the bank.