Banks criticised over low equity premiums

Banks routinely charge borrowers with less than 20% equity an additional "low equity premium", "low equity margin", or upfront fee as a condition for lending to high-LVR home buyers.

While borrowers are informed about low equity premiums before they take out a loan, many customers are unaware that they can move to better interest rates once they have paid some of their mortgage down, or when their equity value increases.

New Zealanders potentially pay millions in unnecessary low equity premium fees, as many banks fail to inform customers about their right to switch. 

Advisers say borrowers should be kept up to date with their mortgage and their ability to move away from low equity premiums and charges.

Matt Kensington of Zest Brokers told TMM Online that low equity margins (LEMs) "certainly have their place", but said "the line from the banks that they actively review the margins is rubbish".

Kensington said a client was recently forced to stay on an LEM with one big four bank after falling "just short" of 20% on their deposit. The client received additional equity from their parent weeks after settlement, but was forced to stay on the LEM for six months.

"Clients are quite ‘green’ and would have no idea to question the bank unless someone pointed it out to them, so I hate to imagine how often this is happening to FHBs that have done it [organised their mortgage] themselves," Kensington added.

Tony Hall, an adviser at Financing Futures, said current low equity fee charges were in line with previous charges such as Lenders Mortgage Insurance. But he said low equity margins on loans could be "dishonest", as the onus was on customers to review their LVR situation. 

"I have not seen a single case of a bank proactively approaching the client and suggesting they may be back below 80% LVR," Hall added. 

Martin Thomas of Mortgage People said he has always viewed low equity fees as a "privilege fee", but called on advisers and clients to review their LVR situation.

"I have always encouraged my clients to review their LVR situation each time they review their borrowings with me or choose to fix or re-fix their loans. That way they are not reliant on the bank notifying them of their possible strengthened LVR position. I see this “coaching” as another service brokers can offer their clients as part of their ongoing business relationship."