The low-down on low-deposit fees
KiwiBuild lets you buy a house with a low deposit – but here’s what you need to know about fees.
16 October 2018
The banks have committed to lending to KiwiBuild customers with low deposits. Known as low-equity lending – these loans allow those that can’t save a 20% deposit to get on the property ladder sooner.
However they come with a cost and the amount varies significantly. Here’s what you need to know.
There are typically two options:
• Low-equity fee (LEF): This is a one-off fee charged and added on to the loan when it’s drawn down. The fee is a percentage (normally around 1%) of the total loan amount. While 1% may seem low, remember it’s added onto the loan so you’ll also pay interest on that amount too.
• Low-equity margin (LEM): This is a margin added to the interest rate at the time the loan is drawn down. The idea is the borrower pays the higher interest rate until they have paid off enough of the principal to release the margin. This is normally when the borrower has built up 20% equity in the property.
Pros and cons
There are pros and cons for each option. A low-equity fee is more set-and-forget, but it increases your loan amount and therefore the amount of interest you pay over the life of the loan.
On the other hand, a low-equity margin costs more in the short term because of the higher interest rate. However, if you pay the principal down quickly you can release the margin and therefore the amount of interest you’re charged. To get the most benefit from this option it’s important to be disciplined and pay off your mortgage as quickly as possible.
So which is the best option?
Which option is best for you will depend on your individual circumstances so it pays to get good advice.
A Mike Pero mortgage adviser will be able to explain the different options and even help you understand the cost differences between a LEM and LEF for the house you want to buy. There are also a range of non-bank lenders that offer alternative ways to borrow.
Find your nearest Mike Pero Mortgage Adviser and give them a call today.