ANZ increases low equity fixed interest rate threshold

ANZ has changed the terms of its fixed interest rate home loan offers.

Effective last Friday the bank has increased its low-equity fixed-interest rate threshold from an 80% loan-to-value ratio (LVR) to 90%.

"This means ANZ's home loan fixed interest rates apply to new home loans with at least 10% equity or deposit, existing ANZ Home Loans (unless otherwise specified) or where we confirm that the lending qualifies as an exemption to the Reserve Bank LVR restrictions (for example refinancing from another bank)," ANZ says.

"Home Loans that don't meet these criteria will have an interest rate that is 0.50% p.a. higher than the rates disclosed on our website."

Loans with a deposit of 20% or more will be charged just the carded rate (or a rate the borrower negotiates). Loans with a 10% to 20% deposit will be charged from the same rate card, plus the low equity premium. Loans with less than a 10% deposit will be charged the carded rate, plus 0.50%, plus the low equity premium.

That low equity premium is additional to the higher interest rate and applies to all loans above 80% LVR. It applies on a variable scale. A registered valuer's report will also be required for such lending.

ANZ says it charges low equity fees "to recover the extra costs it incurs when lending above 80% of a property's value".  See full details of the major banks' low equity margins and fees here.

ANZ Low Equity Premium (LEP)
Loan to value ratio	% of the loan amount
80.01 - 85.00%	0.25%
85.01 - 90.00%	0.75%
over 90%	2.00%

The roll back from requiring a 20% deposit to a 10% one acknowledges a market reality - they are not writing enough business and they need first home buyers back in the market.

They can make this adjustment because in hindsight, they over-responded to the Reserve Bank's high LVR "speed limit" . That speed limit restriction has not changed but the headroom most banks have under it permits a more aggressive stance.

On the battlefield, the pressure is on and banks have recently started to relax their rules on a de facto basis, according to reports from mortgage brokers.

Most other banks have quietly removed their specified low equity rate offers, but many are still applying a LVR 80% limit, and either a low equity premium, or a low equity fee. Both BNZ and Westpac recently disestablished what they referred to as two tier home loan interest rate structure, removing all carded, or advertised, home loan rates for borrowers without a deposit of at least 20%.

With this move by ANZ it is very likely their main rivals will follow suit fairly quickly - if they haven't already done so in practice.

Coming just days before the next Reserve Bank Official Cash Rate review on Thursday, ANZ is sending a strong market signal that not only do they have their system controls in place to not exceed the regulatory limit, but that they are now targeting borrowers who have only a 10% deposit.

The Reserve Bank introduced restrictions on banks' high LVR residential mortgages from October 1 last year. This means banks must restrict lending at LVRs above 80% (where borrowers don't have a deposit of at least 20%) to no more than 10% of total new mortgage lending. This 10% limit excludes high LVR loans made under Housing New Zealands Welcome Home Loans scheme, the refinancing of existing high-LVR loans, bridging finance or the transfer of existing high-LVR loans between properties, and new residential construction loans.

Banks are being measured by the Reserve Bank on the LVR speed limit, for the first time, on a rolling six month basis for the period to March 31. The results of this will be out later this month.

So far the Reserve Bank has released monthly results for the five months to February. And these showed that during that five months the amount of high LVR lending was running at around 7.25% before exemptions, and under 6.2% after exemptions. This suggests all the major banks are comfortably under the 10% limit.