You’ve probably heard the terms Low Equity Margin or Low Equity Premium thrown around lately, so what exactly are they?
What are Low Equity Margins & Premiums?
Low Equity Margins and Premiums (LEM’s and LEP’s) are a fee the bank charges borrowers when they have less than 80% equity in their property i.e. less than a 20% deposit.
For example, if you want to purchase a house for 500k, but have less than 100k deposit, then you are borrowing more than 80% of the value of the property. This is what is referred to as the loan-to-value ratio, or LVR, of the loan. Banks are generally allowed to only go to 80% LVR for owner-occupied homes for first home buyers but there are exceptions to the rule!
How does the bank calculate my LEM or LEP?
When the bank approves a loan with an LVR above 80% they charge you a low equity margin or premium. What this means is that they will put a margin on top of your interest rate. Depending on the loan-to-value ratio and the bank your loan is with this margin will differ but as an example, if you have a 10-15% deposit, you will be charged around 0.75% on top of your rate.
Some banks charge an upfront fee, which can sometimes be added to your loan, and a smaller LEM on your interest rate of somewhere between 0.25% and 0.45%.
Why do the charge these fees?
The bank charges these fees to cover the added cost of the risk involved in having loans with smaller deposits. All banks go about it slightly differently so it’s best to talk to the team at My Mortgage to see what we can do for your personal situation.
Can I get my LEM or LEP removed?
The good news is that once you go under 80% LVR, we can get this LEM removed for you. As your property goes up in value, your LVR comes down! Alternatively, if you can pay your loan down a bit quicker in the beginning and can get below that 80% mark we can also have that LEM removed and you’ll be paying the higher interest rate for less time.
If you have purchased recently and have an LEM applied to your interest rate, your house may have gone up in value and we could check to see where things are at for you to get that LEM removed.
It’s certainly possible to get into the market with less than a 20% deposit so reach out to the My Mortgage team and we’d be more than happy to see what we can do for you.