Low Equity Fee / Low Equity Margin for First Home Buyers

Low Equity Fee (LEF) or Low Equity Margin (LEM) is very important to understand if you are buying your first home with less than 20% deposit.  Having less than 20% deposit on a home is seen as risk to the bank and as a result an LEF OR a LEM can apply. 

A LEF is is a one-off charge which is usually added to the mortgage and increases the overall cost of borrowing. This one-off charge can be anywhere between 0.25% to 2.0% added to the mortgage. The lower the deposit, the higher the percentage. The advantage of LEF is that you can pay it and move forward. Note: If you are going to use the ‘First Home Loan’ scheme – a 1% Lenders Mortgage Insurance premium which works in the same way as a LEF (if applied by the lender).  

A LEM is an additional interest rate or margin added until there is enough equity (20%) in the property. The additional interest/ margin added ranges between 0.25% to 2.0% depending on how small the initial home deposit is. The lower the deposit, the higher the margin.  

Note that depending on the bank - break-fees may apply if the 20% equity is reached mid-way through the fixed-term and you want to remove LEM. However, it is important to get to the 20% mark as quickly as possible to get rid of LEM. 

Ways you can raise funds to increase your equity: 

• Pay down principal: Have the right mortgage structure in place to make sure you can pay down the principal faster and pay less on interest payments – Talk to a mortgage adviser (aka mortgage broker) to advice you on your mortgage structure.  

• Renovation  

• Capital gains (i.e., property prices increasing) 

• Gifting from friends/ family 

• Second occupations/ side-hustle/ selling off belongings. 

There are many expenses associated with purchasing your first home and it’s advantageous to your cash-flow to get rid of LEM or avoid LEF by getting to 20% equity/ starting with 20% deposit.