Unpacking Low Equity Premiums and Their Impact on Your Mortgage
In response to rising Official Cash Rate from the Reserve Bank, banks are increasing their interest rates. If you're a homeowner with less than a 20% deposit, it's crucial to understand low equity premiums' implications on your mortgage repayments.
Low equity premiums—also known as low equity fees or margins—vary by bank, but they typically apply an additional charge to mortgage applicants with less than a 20% property deposit. Essentially, these premiums serve as the bank's insurance, guarding it against losses should a borrower default and the property sell for less than the loan amount.
Recently, the Reserve Bank has updated regulations on low equity lending. Banks can now allocate up to 15% of their total lending to borrowers with less than 20% equity.
Low equity premium rates differ by bank but generally range from 0.25% to 0.3% for borrowers with a 15% deposit, climbing up to 0.75% for those with just a 10% deposit. While seemingly small, over a mortgage's lifespan, these figures can significantly impact.
Consider this scenario: You wish to buy a home worth $800,000 but have only a 10% deposit, requiring you to borrow $720,000. The low equity premium could increase your interest rate to around 7.5%. You'd have to pay down the loan to $640,000 to eliminate the low equity premium, equating to around 6.5 years of low equity premium payments.
To grasp what a low equity premium might mean for you, use our online mortgage calculator.
Many homeowners' mortgages will soon transition from fixed terms. It's worth examining if a low equity premium will continue to affect your new interest rate. If your property value has risen to a point where the premium is no longer required, your bank may not automatically remove it. Hence, you may need to provide proof, like a registered valuation, to remove the low equity premium.
Remember, if interest rates rise, understanding your loan's rates prevents paying more than necessary on your mortgage.
We understand that every homeowner's situation is unique. Thus, at Total Mortgages, we focus on providing personalised advice to help you navigate the complexities of your mortgage and low equity premiums. We'd be delighted to schedule a call with you to discuss your specific circumstances and explore optimal solutions. Book a call with us today, and let's ensure you're making the most informed decisions for your financial future.