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Loan cost inversely proportional to deposit

Hike in premium- Hamish Patel.jpgContrary to popular belief, there are still many options available for buying a home with less than 20% deposit. There can be a big difference in pricing between lenders on low deposit home loans.

I have found vast differences, some times as much as $500 in the cost of an average sized home loan. It therefore pays to do your homework.

Ratio and cost

Let us look at the extra cost of buying a $400,000 home with 10% deposit at various lenders. I have grouped the banks with similar charges. Some actual costs could be slightly different, especially after negotiation with the lender.

Upfront low

equity premium

Total Cost at end of year 1

Total cost at end of year 2

Total cost at end of year 3

Bank A

$2520

$2520

$2520

$2520

Bank B

$7200

$7200

$7200

$7200

Bank C

$400

$4000

$7600

$11,200

As per the above chart, some lenders charge a margin on their interest rate instead of upfront fees. This means the cost would be ongoing until you have more than 20% equity in your home. These lenders also offer to reduce margins with the increase in your equity.

I have observed that with 10% deposit, banks that claim to be the cheapest can be the most expensive.

In the above example, Bank A is the cheapest but as you would expect, the lending criteria would be relatively tough and you would be expected to pay off your loan earlier. This would make repayments on a weekly basis similar between bank A and C but effectively you would be paying more interest with bank C.

In order to determine where your lender fits in the above table, simply ask the following two questions:

1. What is the setup fees including the low equity fee on the home loan?

2. What is the interest rate margin for the home loan?

You could also get a good mortgage broker to do some of the running around for you, although not all of them have access to all the banks.

Your choice of banks would diminish if your deposit ratio declines to 5% unless you have equity in another property or someone is willing to give you a guarantee.

Editor’s Note: If you would like to know the identity of the banks mentioned in the above table, please contact Hamish Patel is an insurance adviser for mortgagesonline.co.nz and can be contacted on (09) 6254693. Email: hamish@monline.co.nz.

The above should be taken only as a guideline and not as specific advice. A full disclosure statement is available on request.

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