Low-deposit buyers get higher loan rates
OPINION: If you moved somewhere new, and found you were expected to pay more at the local supermarket than people who had shopped there for a year, you’d be outraged.
But that’s what’s happening in the not-entirely-fair world of lowequity home loans.
Banks are making far fewer new home loans to people with deposits smaller than 20% than they used to.
In August 2020, the banks lent $757 million to homebuyers with less than 20% equity, data from the Reserve Bank of New Zealand Te Pūtea Matua shows. In August this year, they lent $439m to lowequity buyers.
Those buyers were made to pay more for their loans.
ASB and BNZ add a low-equity margin on to their ordinary loan price. A one-year, fixed-rate loan will cost a buyer with a 10% deposit the banks’ normal 5.45% rate, plus a low-equity margin premium of 0.75%.
That makes for a total of 6.2%. Westpac has ‘‘special’’ rates for people with 20% or more equity, and non-special rates for lowdeposit buyers.
Its one-year special rate is 5.45%. Its non-special rate is 6.05%.
ANZ’s one-year fixed special rate is 5.45%, but low-equity buyers have to pay the nonspecial rate of 6.05%. ANZ also charges a one-off low equity premium; 0.75% for a buyer with a 10% deposit.
At Kiwibank, a 10% deposit buyer pays the non-special rate of 6.39% compared to 5.39% for the people with more than 20% equity.
One mortgage company chief executive dubbed the ANZ and Kiwibank models ‘‘doubledipping’’.
Lower-deposit loans are more costly to make for banks, as they have to hold more capital against them.
They could spread the cost over all their mortgage customers, but they choose not to, and the range of pricing is not consistent across the banks, and that’s concerning, as it suggests a lack of competition.
With the Reserve Bank limiting low-deposit lending, banks do the lion’s share of their low-deposit lending to their current customers, so low-deposit buyers can’t shop around easily.
But back to the supermarket analogy.
Think of two people with sub20% equity loans at the same bank.
One has just bought their home, and has paid a low-equity borrowing price because they had a 15% deposit.
The other bought their home last year with a 21% deposit, but since then, their house has fallen in value by 6%.
Both are therefore low-deposit borrowers, but the buyer from a year ago does not pay low-deposit borrower rates.
This is because banks only charge their low-deposit rates to borrowers who have less than 20% equity when they take out their loan.
If you have an existing loan, and your equity slips below 20%, your bank is unlikely to reprice your loan and start charging your low-equity rates, unless you do something like try to extend the loan.
Is this fair on the new buyers? Not really, and there’s another level of unfair happening. Once you’re paying low-equity loan rates, you have to convince your bank to start charging you what higher-equity borrowers pay.
People who are educated, and proactively engage with their banks, will be the ones who get the additional fees removed fastest.
I suspect some people pay lowequity premiums for longer than they should.