LMI – the difference it can make to first home buyers
With the easing of LVR restrictions at the start of 2018, more first home buyers are able to get on the housing ladder. Latest Reserve Bank data shows that lending to first home buyers with deposits of less than 20%, rose from $149m in April 2017 to $275m in April this year. However, for these buyers, opportunity often comes with a little talked about premium added to their loan, Lenders Mortgage Insurance (LMI).
LMI is an insurance policy that protects the lender from financial loss in the event that the borrower can’t keep up their home repayments. It is often a condition of a high LVR loan and the borrower bears the cost.
“LMI is not a Reserve Bank requirement, and there are a small number of lenders who have chosen not to charge it. However, when it is applied it is either as a low equity fee or low equity margin.” Explains Canstar general manager Jose George. “The most common way is through an additional ‘margin’, in some cases it can be more than 1.50%, added to agreed home loan interest rate. As the LVR decreases, a borrower can request that the equity margin is reduced. Eventually, once the lender is satisfied the LVR is 80% or less, the margin will no longer apply.”
The alternative, is an up-front, one-off low equity fee, of up to 0.80% of the loan value, that is added to the agreed loan amount.
To demonstrate the potential impact LMI could have on borrowers, let’s take Auckland couple Alex and Josh. They have a 10% deposit and are buying their first home in Auckland for $850,000. Bank A operates a low equity margin, Bank B, a low equity fee, Bank C does not charge lenders mortgage insurance.
Low Equity Margin
Low Equity Fee
|Loan Term||25 years||25 years||25 years|
|Lenders Mortgage Insurance||Low equity margin added
to the home loan interest rate|
0.75% margin added for a LVR of 85.01% to 90.00%. Reduces to:
0.25% margin when LVR fall to between 80.01% to 85.00%
No margin once LVR reduces to 80% or below.
fee charged upfront at 90% LVR:|
0.75% of the loan amount equals a fee of $5,737.50 which is included into the loan amount
|No margin or fees|
|Monthly Repayments||• $4,716.06 for the first 34
• $4,509.17 for months 35 to 61²
|$4,411.86 per month||$4379.00 per month|
|Total Repayments after 61 monthly payments (after which margin no longer applicable)||$282,093.63||$269,123.46||$267,119.00|
loan amounts are based on the latest median house prices
from the REINZ. Calculations are based on the assumption
that the value of the property and interest rate is constant
and the LVR reduces as the repayments are made.
¹0.75% Low Equity Margin applicable for first 34 monthly repayments as LVR higher that 85.01%
²0.25% Low Equity Margin applicable for next 27 monthly repayments as LVR between 80.01% and 85.00%
George goes on to say:
“Getting a good deal on your home loan rate is always important but for borrowers with a deposit of less than 20%, there’s a lot more to consider. Canstar recommends that consumers get as much advice as they can, from as many different sources, so they can make an informed decision. As our calculations show, all is often not equal when it comes to home loans.”
The top-rated provider – First Home Buyers
First home buyers have been impacted more than any other group by the record house price growth New Zealand has experienced in recent years, so the focus on how to get young Kiwis onto the property ladder is an ongoing priority. As part of the focus, Canstar recently conducted its annual evaluation on the price, costs and features of 57 first home buyer products across nine providers. For the eighth year running, Canstar are delighted to announce Kiwibank as the first home buyers Bank of the Year
Accepting the award, Kiwibank Product Manager – Lending, Chris Greig said:
“Kiwibank understands that the landscape for first home buyers has changed over the past 10 years and the journey to home ownership is not always straightforward. We aim to be a partner with first home buyers at all stages of this journey from saving for a deposit through to getting the keys for your house.
“There are a lot of factors that are part of the home buying process and for first home buyers this can be overwhelming. Kiwibank have specialist home lenders who can help guide you through the process even if you might not be ready to buy straight away.
We’re proud to accept this award which acknowledges our ongoing commitment to making Kiwi’s better off. “