Unpacking LEPs, LEMs and other home finance jargon
“LEPs…LEMs…” sorry, what now?
Whether you’re a first home, next home or investment property buyer you may or may not have heard of these acronyms before. But we know amongst our clients, these terms are often commonly mistaken, or unknown so we thought this was a great chance to unpack some of the unheard home finance jargon relating to low deposit home lending.
Let’s start off light.
What is low deposit lending & why is it different to normal home lending?
Low deposit lending is any home loan where the loan amount is greater than 80% of the purchase price or value of the property. This type of lending is considered to be riskier to a bank or lender as, if the borrower defaults on the loan, the lender has to sell the property for a higher amount to recoup their costs.
The Reserve Bank of New Zealand (RBNZ) also impose restrictions on registered banks that state that no more than 10% of their loans each month can be in the low deposit space. This means that they have particularly strict lending criteria and can be extra picky about who they lend these funds to.
In exchange for the greater risk these home loans possess, Banks have different ways of mitigating these risks. Some of these are detailed below.
Low equity premium (LEP)
This is a one-off fee charged by a handful of banks (such as, ANZ). This fee is a percentage of the home loan amount ranging anywhere from 0.25% to 1%, depending on the loan to value ratio (LVR).
This fee can usually be added to the home loan amount, which is common, although the interest costs involved in doing this need to be considered. Banks generally charge interest rates that are slightly above market rate in this case.
LEMs Low equity margin (LEM)
LEMs are commonly used by New Zealand Banks ASB, Westpac & BNZ.
This is a margin added to the interest rates offered by these banks. This in turn means interest costs (and subsequently, repayments) are higher in value. Margins generally range from 0.25% to 0.75% and stay in place until the loan to value ratio drops to 80% or below. This can happen one of two ways; either by paying down debt or by the property increasing in value. At times it can also be a combination of the two.
Other finance options
Kainga Ora offer the first home loan product in conjunction with 5 lenders (Westpac, Kiwibank, SBS Bank, The Co-operative Bank & Unity Credit Union). If the borrower meets certain criteria, they can apply for these loans.
Kainga Ora provide a guarantee which means the borrower is eligible for market leading interest rates without LEMs. However, Kainga Ora do charge a 1% premium which can be added to the loan amount.
Interested to know how you can access low deposit lending?
While it can be tricky to access low deposit home lending and there are often hoops to jump through and costs to consider, it can be a great way to get onto the property ladder so that you can begin to build equity.
Each bank approaches this differently so it pays to get in touch to discuss your unique situation and see where you might fit best. The good news? Turns out we’re experts in this and can help you get started!
Reach out today and see how we can help you take the first step towards building your equity.
While we’re home loan experts, our blog posts are for general information purposes only and are not intended as financial advice. If at any stage you need personalised advice, get in touch on 06 8788 4444 or Ben or Mark.
