If there were no difference in cost to the borrower, this looks like a "six of one, half a dozen of the other" proposition which would make little practical difference.
NZF chief operating officer Adrienne Smith says comparing costs of the new LEM system, under which all borrowers pay the same, with the LMI premiums formerly charged is far from simple.
"LMI premiums vary widely, depending on the borrower's circumstances, and can range from 0.5% right up to nearly 4%," Smith says. In some cases the new LEM system will cost more than paying an LMI premium and in other cases less.
Using LEM, all NZF's borrowers with loan-to-value ratios (LVRs) over 80% and up to 85% pay an 0.5% margin over the carded interest rate, those with LVRs between 85% and 90% pay a 1% margin and those over 90% up to 95% pay a 1.5% margin.
After two years, all LEM loans would be reviewed and the premium adjusted appropriately.
"We do believe this is more simple to explain," Smith says. "Some clients still get it into their head that LMI offers them some sort of protection."
The built in review after two years does encourage borrowers to increase their equity to reduce or eliminate their LEM premium, she says. If a property's value has increased over the two years, the borrower can get a new valuation to reduce or eliminate the LEM premium.
"This is the best time to consider this new structure," Smith says. "Interest rates are still very low and, even including the maximum LEM margin, our clients can secure a 95% home loan for one year at 7.55%. A year ago, this would have been considered a very sharp rate indeed."
