Lending Costs & Strategy
Low Equity Margin NZ: How LEM Works & How to Get It Removed
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Buying a home with less than a 20% deposit is a bit like ordering extra avocado at a café — the bank will happily serve it up, but you are definitely going to notice the surcharge on the final bill.
The straight answer: a low equity margin in NZ (often abbreviated to LEM) is an ongoing interest rate surcharge that New Zealand banks add on top of your standard mortgage interest rate when you borrow more than 80% of a property’s value. Depending on whether your deposit is 5%, 10%, or 15%, an LEM typically adds between 0.25% and 1.50% p.a. to your loan rate.
On a $600,000 mortgage, that extra margin costs you anywhere from $125 to $750 every month in pure interest. The good news is that an LEM is not permanent. But banks will never volunteer to remove it for you — you have to actively trigger the removal process the moment your equity reaches 20%.
What Is a Low Equity Margin (LEM) in New Zealand?
When you purchase a residential property in New Zealand, the Reserve Bank of New Zealand (RBNZ) sets Loan-to-Value Ratio (LVR) rules that govern how much high-LVR lending commercial banks can write.
When a bank lends you more than 80% of a property’s purchase price (meaning your cash home loan deposit is under 20%), they classify the loan as higher risk. To offset this balance sheet risk and manage their regulatory capital requirements, banks apply a low equity margin.
In simple terms: if the bank’s standard 2-year fixed rate is 5.89% and your loan carries an LEM of 0.75%, your actual interest rate becomes 6.64% p.a. until your equity grows.
LEM vs Low Equity Premium (LEP): How Banks Charge You
Depending on which bank or lender you use, low equity costs are structured in one of two ways:
1. Low Equity Margin (LEM)
An ongoing interest rate margin added to your interest rate on each repayment. Used by major banks like ANZ, ASB, and BNZ. You pay it continuously until you actively prove your LVR has dropped to 80% or below.
2. Low Equity Premium / Fee (LEP / LEF)
A one-off upfront fee (e.g., 0.50%–2.00% of the loan amount) added to your total mortgage balance at settlement. Used by select banks like Westpac and certain non-bank lenders. Your interest rate stays standard, but your starting loan balance increases.
Which structure is better depends entirely on how quickly you expect to build equity. If you plan to make aggressive principal repayments or renovate to increase the home's value within 12 to 24 months, an ongoing LEM is usually far cheaper because you can remove it early without losing a non-refundable upfront fee.
The Numbers: Standard LEM Tiers & Monthly Dollar Costs
Low equity margins operate on a tiered ladder based on your exact LVR at loan approval. The smaller your deposit, the higher the margin.
Here is how standard retail bank LEM tiers and one-off LEP alternatives typically break down across New Zealand lenders:
| Deposit % | LVR Tier | Typical LEM (p.a.) | Typical One-Off LEP | Monthly Extra on $600k |
|---|---|---|---|---|
| 15.01% – 19.99% | 80.01% – 85.00% | +0.25% – 0.35% | ~0.50% ($3,000) | +$125 / mo |
| 10.01% – 15.00% | 85.01% – 90.00% | +0.75% – 0.80% | ~1.00% ($6,000) | +$375 / mo |
| 5.00% – 10.00% | 90.01% – 95.00% | +1.25% – 1.50% | ~2.00% ($12,000) | +$625 – $750 / mo |
| 20.00%+ | 80.00% or less | 0.00% (No margin) | $0 | $0 |
Notice what happens on an 88% LVR loan ($600,000 mortgage on a $680,000 purchase). At a 0.75% margin, you are handing the bank an extra $4,500 every single year in unrecoverable interest. If you leave that margin in place for three years without reviewing your valuation, that is $13,500 out of your pocket.
Do All Lenders Charge an LEM? (Kāinga Ora & Non-Banks)
Not every low-deposit borrower is subject to standard retail bank LEM tables. There are two major exceptions in New Zealand:
1. Kāinga Ora First Home Loan
If you are a first home buyer eligible for the Kāinga Ora First Home Loan scheme, you can buy with just a 5% deposit without paying standard commercial bank low equity margins.
Instead of a 1.25%–1.50% annual interest penalty, Kāinga Ora underwrites the mortgage and charges a one-off 0.50% lender underwriter fee added to your loan balance. On a $500,000 loan, that is just $2,500 capitalised once, while you enjoy standard special interest rates on your daily repayments.
2. Non-Bank & Specialist Lenders
Non-bank lenders on our panel (such as Avanti, Pepper Money, Resimac, or Liberty) structure low-equity deals differently. Some non-bank lenders price risk directly into their base interest rate or charge a risk fee depending on credit history and income type (such as self-employed borrowers). With 20 bank and non-bank lenders on our panel, we compare the total cost across both structures before you sign.
The Automatic Removal Myth: Why Banks Keep Quiet
One of the biggest misconceptions in NZ home lending is that your bank monitors your property value and automatically turns off your low equity margin when your equity crosses 20%.
They do not. (Yes, the bank really will keep charging you the higher rate indefinitely unless you ask. No, they won't send a friendly reminder when your equity crosses 20%.)
Banks decline or penalise good applications based on standardised boxes, but more importantly: banks will never volunteer to remove your low equity margin once your equity reaches 20%. They will happily keep charging you the penalty rate month after month until you call them out with a valuation in hand.
The burden of proof is 100% on you as the borrower. If you don’t request the review, you keep paying the surcharge.
4 Steps to Get Your Low Equity Margin Removed
Removing your LEM requires proving to your lender that your current loan balance divided by the property’s current market value is 80.00% or lower. Here is the exact process:
Step 1: Calculate Your Estimated Current LVR
Check your latest mortgage statement for your exact remaining loan balance. Then check recent sales in your street or use property tools (like Homes.co.nz, CoreLogic, or OneRoof) for an indicative property value. Divide loan balance by property value. If the number is under 0.80 (80%), you are ready.
Step 2: Check Your Bank’s Valuation Policy
Every bank has different valuation rules for LEM removal. Some banks accept an automated desktop valuation (e-valuation) if your suburb has high sales confidence. Others require a full Registered Valuation (RV) ordered through an approved bank portal like Valocity or CoreLogic i-Val.
Step 3: Submit the Formal Removal Request
Your home loan adviser lodges the formal request alongside the verified valuation report. The bank’s credit team reviews the LVR and updates your loan structure.
Step 4: Refix Onto Standard Special Rates
Once approved, the margin is removed immediately. If your fixed term is coming up for renewal, you can refix onto the bank's lowest standard "special" fixed rates without any penalty loading.
If your existing bank is unhelpful or slow to acknowledge your equity gains, you can also refinance your mortgage to a competing lender. Refinancing wipes the slate clean, eliminates the LEM, and can secure substantial cash back incentives.
How to Hit 20% Equity Faster
You do not have to wait passively for the market to lift your property value. Here are four practical ways to accelerate your equity growth:
- Increase repayment frequency to fortnightly: Switching from monthly to fortnightly payments effectively creates 26 half-payments a year (equivalent to 13 full months of repayments), knocking thousands off the principal balance faster. (See our guide on how to pay off your home loan faster in NZ).
- Make regular lump-sum principal payments: Most banks allow you to pay up to $10,000 or 5% of your fixed loan balance every year without triggering early repayment break fees.
- High-ROI cosmetic renovations: Painting, modernising kitchens or bathrooms, and basic landscaping can lift registered valuations significantly beyond the actual cash spent.
- Set an annual equity review reminder: Put a recurring reminder in your calendar every 12 months to check your LVR with your adviser.
FAQs
Straight Answers: Low Equity Margins in NZ
What is a low equity margin (LEM) on a New Zealand home loan?
A low equity margin (LEM) is an ongoing interest rate surcharge added to your standard carded mortgage rate when you borrow more than 80% of a property’s value (having less than a 20% deposit). Major NZ banks charge between 0.25% and 1.50% p.a. depending on your Loan-to-Value Ratio (LVR) tier.
What is the difference between a low equity margin (LEM) and a low equity premium (LEP)?
An LEM is an ongoing percentage added to your interest rate for as long as your equity stays below 20%. An LEP (or Low Equity Fee) is a one-off upfront fee (typically 0.50% to 2.00% of the loan amount) capitalised onto your loan balance at settlement. Most major NZ banks charge an ongoing LEM, while some lenders offer an upfront LEP.
Will my bank automatically remove the low equity margin when my equity reaches 20%?
No. Banks in New Zealand will not automatically remove your LEM when property values rise or your mortgage balance drops. You must formally request removal and provide acceptable valuation evidence (such as a registered valuation or an approved desktop e-valuation) proving your LVR has dropped to 80.00% or lower.
How long do borrowers usually pay a low equity margin in NZ?
Most first home buyers pay an LEM for 18 months to 3 years. The exact timeline depends on how fast you pay down loan principal, whether you make lump-sum payments, and regional property value growth in your area.
Does the Kāinga Ora First Home Loan charge a low equity margin?
No. Under the Kāinga Ora First Home Loan scheme (which allows a 5% deposit), participating lenders do not charge standard commercial low equity margins. Instead, Kāinga Ora charges a modest, one-off 0.50% lender underwriter fee that is added to the loan balance at settlement.
Can I refinance my mortgage to get rid of a low equity margin?
Yes. If your current property has appreciated or you have paid down sufficient debt so your LVR is 80% or below, refinancing to a new lender is one of the fastest ways to eliminate the margin while also securing competitive standard rates and potential cashback incentives.
Does AML Home Loans charge a fee to review my low equity margin?
No. We charge zero upfront fee for initial advice and equity reviews. Our remuneration is typically paid by the lender if we restructure or refinance your loan, with our full panel of 20 bank and non-bank lenders disclosed upfront in writing.
About the Author: Kundan Singh
Home Loan Adviser · FSP 512966 · AML Financial Services Limited (FSP 714331)
Kundan founded AML Home Loans in 2017 and has helped settle over 200+ residential mortgages across New Zealand. He specialises in first home buyer lending, low-deposit structuring, and helping homeowners restructure high-interest margins into clean, low-rate facilities.
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