previous column<\/a>, low-equity fees or margins are typically charged, and\/or some banks only offer their more expensive \u201cstandard\u201d interest rates rather than their \u201cspecial\u201d rates to low-equity borrowers. <\/p>\nThe result can be thousands of dollars over the course of the year. If you were borrowing $500,000, there could be between $1500 and $10,500 extra interest per year, depending on the bank and your equity position. <\/p>\n
Generally, the smaller the deposit, the higher the margin. <\/p>\n
If you have the option of choosing a bank, compare their low-equity policies to see which one might work best for you. <\/p>\n
Consider your interest rate strategy carefully <\/p>\n
Those premiums present a bit of a conundrum when choosing how to structure your lending. <\/p>\n
Typically, with fixed interest rates rising as they have been, borrowers \u2013 especially brand-new ones \u2013 want the security of longer-term rates, so they know what they\u2019re in for. <\/p>\n
But Squirrel mortgage adviser Adam Clark says that presents contrasting priorities for low-deposit borrowers because, \u201cIdeally you want to fix short term so that you can jump from 5% to 10% equity etc.\u201d <\/p>\n
That\u2019s because as you increase your equity, you may be eligible for the low-equity premiums to be removed or reduced, which you\u2019d want to take advantage of as quickly as possible. However, most banks will only do that when your fixed rate expires (and may also require a valuation). <\/p>\n
\u201cIt can make for some really tough decisions about how best to proceed,\u201d Clark says. <\/p>\n
If you\u2019re not close to moving into a different equity bracket, it\u2019s not a concern \u2013 but if you are, compare potentially higher future interest rates with the impact of reducing your low-equity margin sooner. <\/p>\n
Be aware there are fewer backstops <\/p>\n
Clark also makes the very good point that there are fewer get-out-of-jail-free cards available to you as a low-deposit borrower if you strike financial difficulty. <\/p>\n
Options banks generally consider in financial hardship situations include temporarily moving to interest-only repayments or offering a repayment deferral. <\/p>\n
However, Clark says when you have low equity it \u201cgives the banks less flexibility to offer this type of relief, as the lower equity means the bank is less able to protect themselves in the event of a mortgagee sale [if it came to that]\u201d. <\/p>\n
That is where it might be worth considering whether personal insurance has a role to play in protecting your financial position if life were to throw you a curveball. <\/p>\n
Don\u2019t assume the only way is up <\/p>\n
As we\u2019ve been reminded over the past few years, it\u2019s unwise to assume property prices will only move in one direction. <\/p>\n
Past property cycles have delivered homeowners significant capital gains, at a pace that would see a low-equity buyer pass that critical threshold of 20% without having to do a thing. <\/p>\n
But the market, for now at least, doesn\u2019t appear poised to skyrocket. <\/p>\n
So, capital gains will not quickly deliver the increase in equity that would allow low-equity premiums to be removed or reduced. <\/p>\n
That leaves you with two options within your control \u2013 increase the value of the property by improving it or pay off debt. <\/p>\n
Or there\u2019s potentially a third option \u2013 keep saving hard before diving in. It\u2019s worth doing the numbers on how much you might save by increasing your deposit and being able to access cheaper rates. <\/p>\n
Catch up on the debates that dominated the week by signing up to our Opinion newsletter<\/a> \u2013 a weekly round-up of our best commentary.<\/p>\n","protected":false},"excerpt":{"rendered":"The Reserve Bank doesn\u2019t publish a breakdown of its low-LVR lending (I did ask for it), so that…\n","protected":false},"author":2,"featured_media":577472,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[5],"tags":[9218,136407,138,3237,5098,8278,20392,13208,68923,36023,41241,1345,78,6036,7494,10527,284318,5812,5829,225,3025,41240,5971,111,139,69,814,84431,131,8229,61,6923,18980,102],"class_list":["post-577471","post","type-post","status-publish","format-standard","has-post-thumbnail","category-business","tag-before","tag-blowing","tag-business","tag-buyers","tag-buying","tag-conditions","tag-deposit","tag-diving","tag-favour","tag-firsthome","tag-higgins","tag-home","tag-in","tag-know","tag-less","tag-loans","tag-lowdeposit","tag-make","tag-many","tag-market","tag-most","tag-nadine","tag-need","tag-new-zealand","tag-newzealand","tag-nz","tag-property","tag-strongly","tag-than","tag-they","tag-to","tag-what","tag-winds","tag-with"],"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/posts\/577471","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/comments?post=577471"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/posts\/577471\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/media\/577472"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/media?parent=577471"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/categories?post=577471"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/tags?post=577471"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}