Buying your own home with less than 20% deposit is possible! While 20% is the magic number for getting your first mortgage, there are often opportunities to buy your home with less. These opportunities usually come with additional costs of low equity margins (LEMs) or low equity premiums (LEPs), so you need to understand what they are and how they can impact your finances.
What is a low equity margin?
When your deposit is below 20%, a low equity margin (LEM) is added to your interest rate. The amount depends on your deposit; the closer you are to the 20% threshold, the less you will be charged.
LEM rates vary, but to give you an idea of costs, a 10% deposit could mean a margin of around 0.75% added to your interest rate. However, if your deposit is larger, say between 15% and 20%, the margin will likely be lower, perhaps around 0.25% to 0.50%.
The LEM compensates the bank for its increased risk when lending against a small deposit. It is temporary and generally removed once you reach 20% equity, either by paying down your loan or if your property’s value rises.
How to quickly build equity in your home:
- Make extra mortgage payments whenever possible to reduce your loan balance. Ensure that your mortgage is structured to allow for these payments.
- If your property’s value increases, get an updated valuation to confirm your higher equity.
What is a low equity premium?
A Low Equity Premium (LEP) is a one-off, upfront fee. It’s calculated as a percentage of your loan amount, typically around 0.75%. Depending on the size of your mortgage, the LEP is usually between $4,000 and $7,000.
Which is better, LEM or LEP?
Which is best depends on your circumstances and financial goals. An LEM might be cheaper if you’re on track to reach the 20% equity threshold soon. An LEP might be better if you are a way off reaching the threshold and would likely end up spending more over the life of a LEM than you would paying an upfront LEP.
Given the costs, should you wait and build your deposit to 20%?
If all this talk of additional cost has put you off getting your first home now, think again. While there is a cost, you get into the market sooner, hopefully benefiting from any capital gains. You are also spending the money you would have spent on rent to pay off your own property instead. And the satisfaction of having your own home is not to be underestimated! The question is whether or not you can afford the additional cost. It isn’t just a matter of maths. It’s about what sort of budget you are comfortable living within.
So, LEM or LEP, or wait and build your deposit? Finding the answer can be complex, but you don’t need to figure it all out yourself! Platinum Mortgages is here to help you understand your options and guide you to a decision that is right for you. We then handle the process for you, from loan application to mortgage structure and beyond. Get in touch today, and let’s get started!