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If you don't have a 20% deposit for a house purchase, all banks will add some serious additional costs to your repayments - but a few add a lot less than others

If you don't have a 20% deposit for a house purchase, all banks will add some serious additional costs to your repayments - but a few add a lot less than others

Fixed mortgage interest rates are at all-time lows.

But all the action is focused on 'special' interest rate offers. That means only clients with at least 20% equity qualify for these rates.

If you don't have 20% you are left with standard carded rates, with most banks adding a "low equity" premium or margin.

So the difference can blow out sharply. For example, BNZ may be offering a very competitive one year fixed rate of 2.79%, but they haven't been lowering their standard rate at the same pace as their 'special' declined. And on top, they will add a "low equity premium" to the standard interest rate.

So if you have a loan-to-value ratio (LVR) of 84%, for example, the rate you will pay them is 4.10%, a full 131 basis points higher than the 'special' offer. If your LVR is 87%, for example, the penalty is 171 bps.

It is similar to other main banks, like Westpac, but the exact amounts differ.

These large gaps have opened up because some banks have chosen not to index their standard rates down as the 'special' offers fell.

In this way, they are making a deliberate decision to seek clients with the best financial status. That helps improve the resilience of their overall loan portfolio, and protects it from potential risks in the future if economic conditions sour. That is a rational strategy for a conservative banker. The bank's depositors will approve.

But it also opens up competitive opportunities for other bankers who don't see the risks that way. ANZ and ASB, for example, have both taken their standard rates down as their 'specials' fell. There is also variation between banks' low equity charges.

Update: [This para has been changed since original publication to make it clear that ANZ charges a one-time fee, and not an interest rate margin.] ANZ is the only bank to apply a set fee that is a percent of the loan amount. Presumably it can be capitalised into the loan amount and paid off over time. The standard interest rate applies, and the cost to the borrower will be different if you pay it in cash at the front end, or you capitalise it. Other banks, like ASB, that add the cost as a margin to the interest rate charged. It is then up to you as borrower to contact your bank to have that rate premium removed when you are no longer in a LVR penalty situation.

Further update: BNZ has moved to reduce its Standard rates after this article was published. The one year variance is now 55 bps and the two year variance is now 60 bps.

Still others don't charge low equity premiums at all, preferring to price the added risk in the difference between 'special' rates and standard. Kiwibank and TSB are like this.

In Kiwibank's case, it can also come with a twist (*). They will give low equity borrowers their hot 'special' rates if they enrol in the Government's First Home Loan programme. A 1% lenders mortgage insurance fee is payable to Kāinga Ora which can be capitalised into the loan amount. If you don't qualify, Kiwibank's standard rates apply. And it turns out that can be a better deal for borrowers in a low equity situation.

TSB doesn't apply a low equity premium either. But they are explicit in that they have limited capacity for this type of exposure, and if you get accepted you have a very good deal too.

Here is an analysis for one year rates.

  1 year Spcl/Std 1 year with low equity premium
  Special margin Standard premium 85% LVR premium 90% LVR
as at May 25, 2020              
  %   %   %   %
ANZ [see update explained above] 2.99 +0.50 3.49 +0.25 3.74 +0.75 4.24
ASB 2.85 +0.50 3.35 +0.30 3.65 +0.75 4.10
2.79 +0.96 3.75 +0.35 4.10 +0.75 4.50
Kiwibank 2.65 +0.75 3.40 0.0* 3.40 0.0* 3.40
Westpac 2.79 +1.36 4.15 +0.25 4.40 +0.75 4.90
Cooperative Bank 3.09 +0.50 3.59 +0.20 3.79 +0.50 4.09
SBS Bank 2.99 +1.86 4.85 +0.50 5.35 +0.50 5.35
2.79 +0.80 3.59 0.0 3.59 0.0 3.59

And here is the same analysis for a two year fixed situation. It reveals different bank strengths and weaknesses in terms of low equity interest rate costs. Maybe somewhat surprisingly, ASB shows up well here, although Kiwibank's different approach also stays strong.

  2 year Spcl/Std 2 year with low equity premium
  Special margin Standard premium 85% LVR premium 90% LVR
as at May 25, 2020              
  %   %   %   %
ANZ [see update explained above] 3.25 +0.50 3.75 +0.25 4.00 +0.75 4.50
ASB 2.69 +0.50 3.19 +0.30 3.49 +0.75 3.94
2.99 +1.00 3.99 +0.35 4.34 +0.75 4.74
Kiwibank 2.79 +0.75 3.54 0.0* 3.54 0.0* 3.54
Westpac 2.99 +1.10 4.09 +0.25 4.34 +0.75 4.84
Cooperative Bank 3.35 +0.50 3.85 +0.20 4.05 +0.50 4.35
SBS Bank 3.05 +2.00 5.05 +0.50 5.55 +0.50 5.55
2.99 +0.80 3.79 0.0 3.79 0.0 3.79

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...the Basel capital adequacy requirements, started in 1988, but announced a few years earlier, forced banks to shift from productive business lending to credit creation for asset purchases.

Basel achieved goal of shifting bank credit into assets, bubbles. Link

Not surprising banks have a risk premium - such as on the 16% equity you use - when property is widely quoted as being expected to fall by 10 to 15%. However what is of particular note is that the risk threshold seems to be 20%. An indication or suggestion that banks have some confidence that they are not expecting a fall of more than that. Not only are they are expecting a 10 to 15% fall, but they are prepared to factor that into their risk assessment.
Those posting unsubstantiated 30 to 50% don’t seem to consistent with the banks‘ view and confidence.

However you look at it , now is not the time to over leverage yourself

A comment of particular concern:
" . . . they are making a deliberate decision to seek clients with the best financial status. That helps improve the resilience of their overall loan portfolio, and protects it from potential risks in the future if economic conditions sour. That is a rational strategy for a conservative banker."
The implication of this is that rather than FHB, banks will be looking to lending to more to the wealthy and in particular property investors.
I have posted that I have talked to a few long term property investors and they are sitting watching and waiting.
Last night I was also talking chewing the fat with a banker involved in commercial lending. He was saying that there had been comment from a number of those involved in lending that they had been significantly busy pre-approving lending for investors.
It is concerning that certainly in the medium term bank lending conditions are going to favour investors and disadvantage FHB and the low equity premium is a clear example of this.

Well yes, if the retail banks only sought the most liquid and richest customers, that is the ultimate. Sit back, smoke a cigar, and watch the numbers. But in the end game of neo-serfdom, banks would be largely irrelevant. Banks only grow by being able to reach deeper and further into the great unwashed. Most people have yet to understand how banks have been a constraint on freedom and productive lives. Don't be surprised if the property-based 'money tree' doesn't work as you've been led to believe.

Yes JC completely agree - its proabably only been the last 5 years where I've started to wonder why we have banks in the form they are. To some extent, I now view them as a deadweight loss on the productive economy.

I'm not quite sure why you put so much faith into the bank and what they publicly release. Global history suggests that banks often lie and have little control or idea or what is going on until it is too late and they need to be bailed out.

Independent Observer
“I've been saying this on here for about 5 years now. Our property market could well be the mother of all bubbles” by Independent Observer 22 March
Prior to the onset of Covid, during those five – yes FIVE - years you were saying we are in for a bubble burst NZ median price were up 54% and even Auckland up 27% over those five years.
Westpac last year estimated 7% increase in prices despite being ridiculed on this site - they were spot on prior covid.
So, if anyone has a history of being wrong, I suggest that there is only one person - and it is not the banks but rather yourself. I will put greater credence on the banks thanks.
I note that you have tried to squirm your way out of that 50% fall you were throwing around.
We wait and see.

Property market likely to fall to 100% of GDP.

60-70% drop. Happens for solid reasons. Covid being a trigger that’s all.

Edit: the NZD price won’t fall much. Post inflation, expect those figures

Could go higher even again, to 600-700%, but doubt it at this point.

This is quite understandable

If you have a 100% mortgage(s) with a bank or banks , then the risk is 100% with the bank in the event of default

And by the end of 2020 , those risks are going to have manifested themselves .

What is astonishing is that banks have willingly lent over 80% on inflated properties with ridiculously high valuations for the past 7 years.

Their lending bordered on recklessness at times in my view , not only did it inflate property prices , it put their balance sheets at risk ( a loan is an asset on a banks balance sheet so the a higher loan is a "bigger " asset ), and exposed the whole system to risk

If you have a 100% mortgage(s) with a bank or banks , then the risk is 100% with the bank in the event of default
Follow this trail of recent comments:

by Audaxes | 21st May 20, 2:07pm
"Faced with the sudden realisation that loan repayments are drying up, it has always seemed that at this point the bank becomes, well, all 'bankish' on it and says, agitatedly: "HEY, give me my money back!"

"Well, I think we really are all in this one together."

Depositors certainly are and remain unsecured creditors of bank IOUs offered up to purchase borrowers' IOUs. No money here, just promises to pay. Nonetheless,

According to the Reserve Bank, the new capital requirements mean banks will need to contribute $12 of their shareholders' money for every $100 of lending up from $8 now, with depositors and creditors providing the rest.

by Te Kooti | 21st May 20, 3:24pm
Incorrect. ANZ have $84bn of housing loans for which their internal model calculates $17.4b of RWA. They hold capital against the RWA, so 12.5% x $17.4b = $2.2b capital. So for every $100 of housing loans they hold $2.60 of equity.

Pretty leveraged huh!

by Te Kooti | 21st May 20, 3:29pm
It's actually even worse, their minimum reg capital requirement for $90b of home loan's is only $1.4b, so $1.55 of capital for every $100.

Page 86 on this link. I will give you housing dgm's this - that is extraordinary leverage!

Thks for the proper context Audaxes (shouts out to TK too).

Nice work

These loans will all have much higher risk weightings, so interest rate differential is expected.

FYI TSB do charge a margin according to their fine print and friends I have who borrowed through them, it's the sentence straight after the one you quote about availability of funds.

"A minimum deposit of 20% is required for home loan special interest rates and residential loans. Residential loans with less than a 20% deposit are subject to availability of funds. If the bank accepts a loan application that falls outside normal lending criteria, a risk-based premium of up to 2% may be applied"

You also have to note that the banks put a risk margin onto low equity lending because the reserve bank requires them to hold more funds in reserve for low equity lending defaults so the cost of this increases the costs to the banks which is then passed onto the customer, this is similar to ACC levies on motorcycles being much higher in your yearly rego than a car so the rego price for a motorcycle is higher, this is not a bank doing anything more than recovering costs targeted at the higher risk customer than spreading it across all customers. Banks have been reckless according to some with their lending but you can imagine what would be said about them if they refused to lend to low equity clients so caught between a rock and a hard place. NZer's love of owning their own piece of dirt is to blame not banks lending practices.

Business should be related to risk.

Lower the deposit bigger the risk to bank specially when their is a possibility of housing price falling drastically or minimum by 15% to 20%.

If banks are not carefull they may end up with loss by having given loan for more than the house value / collaateral.

If banks are not carefull they may end up paying the prise for the folly of speculators or FHB under FOMO.

Can anyone give me an update on offered negotiated rates and cash back offers?

Good question - which looks at this as well suggests contacting a mortgage broker. Cashback AFAIK probably won't be offered to low-deposit.

We are currently at around 13% deposit.
Just been looking around and a Mike Pero broker said sbs would be keen based on our current criteria (we're both in secure government jobs).
Haven't heard about the interest rate yet.
Anyone know how it would break down with SBS? Surely it wouldn't be 5%+? Or would it? I know the broker mentioned the potential for a one off 1% fee to qualify for better interest rates.

Anyone have any more details? I'm admittedly a novice at all of this. Note: we aren't looking to purchase yet. Just getting our ducks in a row.

Normally a 0.5% low equity margin on interest rates. Some banks just charge a one off premium i think?

SBS offer "First Home Loan" (formerly Welcome Home Loan) if the house fits in the regional price cap and your income fits below the $130k joint income threshold you might be able to access the scheme. The 1% is a one off government underwrite fee(low equity premium or insurance) since they guarantee the higher risk loan to the bank itself.
With SBS they give you access to their special rates even at 5% deposit so usually well worth it