First-home buyers' extra bill
The interest rate premium can add almost $15,000 over five years.
Buyers with small deposits are paying up to $15,000 extra over the first years of their loans because of bank fees and premiums.
Research house Canstar has conducted an analysis of the low-equity premiums and fees that banks charge borrowers with less than 20 per cent deposit.
While loan-to-value restrictions remain in place, low-equity borrowing is becoming more common.
Reserve Bank data shows that lending to first-home buyers with deposits of less than 20 per cent rose from $149 million in April 2017 to $275m in April this year.
READ MORE: How to get a deposit together to buy a house
But that usually comes at a cost. Most of the banks charge these borrowers an extra fee.
How they do it varies: The big four banks add an extra, ongoing margin on top of their normal home loan interest rate. This ranges from 25 basis points for those with almost 20 per cent deposit, through to 200 basis points ANZ for borrowers with less than 10 per cent.
Kiwibank charges a one-off fee of between 0.25 per cent of the loan amount and 0.8 per cent.
In most cases, these buyers also cannot access the "special" rates banks advertise.
Canstar general manager Jose George said the premiums were lenders mortgage insurance (LMI), to protect the banks from financial loss if the borrower defaulted.
First-home buyers with deposits of less than 20 per cent are generally charged an extra fee by the bank.
"LMI is not a Reserve Bank requirement, and there are a small number of lenders who have chosen not to charge it. However, when it is applied it is either as a low-equity fee or low-equity margin.
"[With a margin] as the loan-to-value ratio decreases, a borrower can request that the equity margin is reduced. Eventually, once the lender is satisfied the LVR is 80 per cent or less, the margin will no longer apply."
He said someone with a 10 per cent deposit buying a house in Auckland for $850,000 on an interest rate of 4.70 per cent would pay $282.093.63 in the first five years of their loan, if they went to a bank with a reducing margin structure,
After that time they would have built up enough equity to have the margin removed completely.
They would pay $269,123.46 over the same period if they were to pay a one-off fee.
Without either, they would pay $267,119.
Broker Glen McLeod said it was something he approached with buyers on a case-by-case basis. If prices were increasing, it would be possible to have a property revalued quickly to show that the buyers had built enough equity to get rid of the premium.
"We will work out whether a one-off fee will be cheaper than a margin when we are working with the client."
He said, while it used to be the case that low-deposit borrowers could dodge the charges, that had changed and anyone with a small deposit would be affected,
If someone was using a parent's property as security, it would not apply.
George said it showed there were multiple factors for first-home buyers to consider.
"Canstar recommends that consumers get as much advice as they can, from as many different sources, so they can make an informed decision. As our calculations show, all is often not equal when it comes to home loans."
- Stuff
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