Low Deposit Home Loans - The Definitive Guide
Compare the best low deposit mortgage offers and buy a home sooner with a mortgage that side-steps the standard 20% deposit rule
Updated 8 May 2022
A low deposit home loan allows you to buy a property with less than the standard 20% deposit. The government-backed First Home Loan scheme lets qualifying borrowers move into their first home with a 5% deposit. For a home selling for around $500,000, saving for a 5% deposit is much easier than 20% ($25,000 vs $100,000).
This guide explains everything you need to know about low-deposit home loans, the pros and cons and what lenders offer them. We cover:
Know this first: Eligible New Zealanders can buy a home loan with a 5% deposit:
A low deposit home loan allows you to buy a property with less than the standard 20% deposit. The government-backed First Home Loan scheme lets qualifying borrowers move into their first home with a 5% deposit. For a home selling for around $500,000, saving for a 5% deposit is much easier than 20% ($25,000 vs $100,000).
This guide explains everything you need to know about low-deposit home loans, the pros and cons and what lenders offer them. We cover:
- 5% vs 20% Deposits
- Applying for a low-deposit home loan – 8 things you need to Know
- Low-Deposit Home Loans – Pros and Cons
- Frequently Asked Questions
- Low-Deposit Mortgage Lenders
- Be aware of other expenses (and that you’ll need to save more than a 5% deposit to move home)
Know this first: Eligible New Zealanders can buy a home loan with a 5% deposit:
- New Zealand’s strict banking regulations generally require first homeowners to have a 20% deposit. With the average house price over $600,000, this means saving up to $120,000 – more than twice New Zealand’s $52,500 median income.
- Many banks offer 10% and 15% deposit home loans, but the interest rates are usually higher than those offered to 20%+ deposit borrowers.
- With the helpful First Home Loan scheme, qualifying New Zealanders can borrow up to 95% to buy their first property.
- Do I qualify? In a nutshell, eligible buyers include those with an income for the last 12 months of $85,000 or less (before tax) (or a combined household income up to $130,000 (before tax) in the last 12 months if you're teaming up with another person. The property must fall under the house cap ($600,000 for Auckland and Queenstown, $500,000 for specific areas (Hamilton City, Tauranga City, Western Bay of Plenty District, Kāpiti Coast District, Porirua City, Upper Hutt City, Hutt City, Wellington City, Tasman District, Nelson City, Waimakariri District, Christchurch City, Selwyn District) and $400,000 for the rest of New Zealand.
- You can use a low-deposit home loan for a new-build property - the caps are $100,000 above the existing property limits above.
- If you meet the criteria, you will be able to apply for a mortgage with a Low-Deposit Mortgage Lender.
Understand this first: Is it cheaper to get a 5% deposit mortgage, or save up for a 20% deposit?
Overall, we believe a 20% mortgage is more cost-effective compared to a 5% mortgage over the same period of time. Generally, a First Home Loan will have higher repayments compared to those of a standard 15% or 20% mortgage because there's more loan to pay back in the same amount of time. Our example below shows what you can expect to pay with either option. The overall lifetime cost of a 5% First Home Loan mortgage is higher than a standard 20% mortgage.
Table 1 - First Home Loan vs Standard Mortgage Costs
Table 1 - First Home Loan vs Standard Mortgage Costs
Property Details |
5% Deposit for First Home Loan |
20% Deposit Standard Mortgage |
Property Value |
$500,000 |
$500,000 |
Deposit Size |
$25,000 (5%) |
$100,000 (20%) |
Mortgage Amount |
$475,000 |
$400,000 |
LMI Fee (1% of the borrowing) |
$4,750 |
$0 |
Total Mortgage Repayable |
$479,750 |
$400,000 |
Interest Rate (fixed, 25 year term) |
3.50% |
3.50% |
Monthly Repayment |
$2,402 |
$2,002 |
Total Cost of Mortgage over 25 Years |
$720,522 |
$600,748 |
Data sourced from our Mortgage Calculator
Important:
- The LVR (loan to property value) will be 95%, which is above the traditional 80% maximum permitted by lenders. Specific affordability for low-deposit mortgages applies.
- You’ll be able to use the KiwiSaver First HomeStart Grant if you qualify – this can help you with a non-repayable grant of up to $20,000.
- You’ll also be able to withdraw your KiwiSaver balance to help with the deposit.
- The First Home Loan scheme requires you to pay lenders mortgage insurance (LMI), which is a one-off 1% of the borrowed amount. For example, if your home costs $500,000 and your mortgage is $475,000, your LMI fee will be $4,750. LMI is charged to protect lenders in case borrowers can’t repay (and the property is later sold at a loss).
- While qualification for the First Home Loan scheme is very clear, low-deposit home loans generally cost more in the long-term as you will pay more in interest given the amount borrowed is higher. Your regular mortgage repayment will also be higher compared to a 20% mortgage.
Applying for a low-deposit home loan – 8 things you need to know:
The First Home Loan scheme is the only way to arrange a 5% deposit mortgage. And beyond that, no bank will otherwise lend below 10% due to New Zealand’s responsible lending laws that went into force after the 2008 financial crisis. However, just because you qualify for a low-deposit mortgage doesn’t mean you’ll automatically be approved.
Whether you're applying for a 5%, 10%, 15% or even 20% deposit mortgage, to best prepare for your application, we suggest the following course of action:
Whether you're applying for a 5%, 10%, 15% or even 20% deposit mortgage, to best prepare for your application, we suggest the following course of action:
- Know your credit history – our guide to credit scores explains how to access your credit records for free and challenge any incorrect information. Having the right credit history means the lender can assess you with correct information.
- Save for a deposit – beyond a balance of cash saved, you can also look at accessing your KiwiSaver balance and preparing to apply for the HomeStart grant.
- Clean up your financial habits – lenders like to see good money management, not unauthorised defaults, dishonours fees, late charges and bad loan).
- Minimise debt – make an effort to pay back consumer and personal debt, as a 95% mortgage can be expensive when it comes to repayments. Being as debt-free as possible will help make your personal finances a lot easier to manage.
- Steady long-term employment/income – lenders like to see someone who earns money month after month. If you have absences in your earning, be prepared to explain why they occurred.
- Consider contacting a mortgage broker. Their service is free (the lender pays them) and offer many benefits. You can explain your plans and listen to their expertise and advice. Best of all, when it comes to applying for a low-deposit mortgage, mortgage brokers know how to get the best deal.
- Cut back on unnecessary spending – living costs are at record highs in New Zealand, so reducing what you don’t need to spend will help significantly with mortgage affordability. The best time to do a review of your expenses is at least six months before you plan to apply for a mortgage. Our guide covering ways to save on household bills and expenses has some helpful tips.
- Don't make any significant financial changes between getting approved and buying your home – this includes applying for car finance, changing jobs or applying for a credit card. Your credit history and income need to be stable for lenders to approve you. Don’t compromise your good history with rushed decisions that can wait until after you move into your home.
Low-Deposit Home Loans – Pros and Cons
There are specific benefits and downsides to buying a home with a low-deposit mortgage. We explain these below:
Pros
Cons
Pros
- It can speed up the homeownership process: If you’re looking to buy a $500,000, you’ll need a $25,000 deposit using the First Home Loan scheme. Otherwise, lenders will require a 20% deposit ($100,000) which will take longer to save for. A 15% deposit is $75,000, which is more obtainable than saving the full $100,000 (even if the ongoing interest rates will be higher).
- If you're using the First Home Loan scheme, many banks will offer their 'special rates' even though your LVR is 95%: Because low deposits mean higher risks for lenders, some banks will add a 'low equity margin'. This means you'll pay the standard rate plus a specific percentage, i.e. 3.10% + 1.20%, meaning an actual interest rate of 4.30% p.a. The good news is that banks like Kiwibank and SBS offer their best rates to First Home Loan customers.
- (Generally) property prices keep increasing so buying early will help your finances overall: Owning a home is most beneficial financially when your equity grows. If the $500,000 home you buy this year is worth $600,000 in five years, your equity has grown $100,000 while you repay the mortgage. Starting your home-owning journey with a low-deposit mortgage helps you to get on the ‘ladder’ as quickly as possible and avoids the risk of paying more for the same property later.
- 20% deposits can be near-impossible: Rents are high, food and lifestyle costs at record levels, so putting together $100,000 in cash for a $500,000 home may take years to achieve with so many other day-to-day expenses.
Cons
- Higher interest rates (unless you're using the First Home Loan scheme): Because low deposits mean higher risks for lenders, some banks will add a 'low equity margin'. This means you'll see a difference between 'special', 'standard', '85% LVR' and '90% LVR' interest rates. The higher the deposit, the lower the rate.
- LMI costs: Using the First Home Loan scheme, you’ll pay 1% of the mortgage balance as a one-off fee, which is usually added to the loan balance. This will usually mean an extra $3,000 to $5,000 depending on the size of the loan.
- A larger loan with higher monthly repayments: However, it does get you on the 'property ladder' sooner, so an increase in total interest costs may be less than the higher price you would have to pay had you waited and saved for a 20% deposit.
Low-Deposit Home Loans - Frequently Asked Questions
Can I use my KiwiSaver balance for my house deposit?
Yes - our KiwiSaver First-Home Withdrawal guide covers everything you need to know. If you meet the requirements of the property being your first home and you plan to live in it, you'll be able to withdraw your KiwiSaver balance to help pay for your deposit. For example, if your mortgage was a total of $500,000, you'd need a KiwiSaver balance of over $25,000 to cover the entire deposit.
If I've saved more than 5%, can I still get a low-deposit home loan?
Yes - the higher your deposit, the more attractive you are to a lender as you're seen a lower risk. If you've saved more than 5%, you can still qualify for a low-deposit home loan. The minimum is 5%, but there is no maximum. Be aware that banks and other mortgage lenders generally offer better interest rates to anyone with a 20% deposit.
What is the lowest deposit needed for a mortgage?
5% is the minimum unless an existing homeowner guarantees your home purchase.
Can I buy a house in New Zealand with no deposit?
No – after the 2008 financial crisis, banks stopped doing this given the higher risk. However, you can get a 100% mortgage if you have a guarantee from a parent who owns a property. However, this is not a recommended course of action as it can create family issues and put both of your homes at risk.
Is a deposit of $20,000 enough to buy a house in New Zealand?
It depends on your location and the property you're considering. $20,000 with a 5% deposit mortgage calculates to a $500,000 loan. This should be sufficient for many properties around New Zealand, although options in Auckland and certain hotspots will be limited.
Can I buy a house in New Zealand with bad credit?
Yes - lenders look at affordability alongside your credit history. If you have debt issues and want to get help, our debt assistance guide has further details.
Low-Deposit Mortgage Lenders
Our list below covers lenders who actively market low-deposit home loans. In most cases, the bank 'special offer' interest rates will require at least a 20% deposit, while those looking at a higher LVR will pay more. The exception may be the First Home Loan scheme, although this depends entirely on the lender.
We suggest contacting a mortgage broker who will be familiar with the best lenders for whatever your situation is. Banks and alternative lenders' published rates are not always what you'll be offered given the complexities with low-deposit mortgages. A trusted mortgage broker is arguably a good idea to arrange the best offer while avoiding multiple mortgage applications.
Important - Understand how a Low Equity Margin (LEM) works and how it affects the interest rate you pay
We suggest contacting a mortgage broker who will be familiar with the best lenders for whatever your situation is. Banks and alternative lenders' published rates are not always what you'll be offered given the complexities with low-deposit mortgages. A trusted mortgage broker is arguably a good idea to arrange the best offer while avoiding multiple mortgage applications.
Important - Understand how a Low Equity Margin (LEM) works and how it affects the interest rate you pay
- For loans with less than 20% equity, some banks may apply a "Low Equity Margin" (LEM) or similar charge.
- The LEM is an interest margin that applies to anyone who borrows more than 80% of their property’s value. In such cases, a bank may apply "Low Equity Margin Bands" when the LVR is above 80%. For example, these LEMs could be:
- LVR 80.01 to 85%: LEM of 0.30% p.a.
- LVR 85.01 to 90%: LEM of 0.75% p.a.
- LVR 90.01 to 95%: LEM of 1.30% p.a.
- LVR >95.01%: LEM of 1.50% p.a.
- If the standard interest rate is 3.50% p.a, anyone borrowing with an LVR of 85% will pay 3.80% p.a. (3.50% p.a. + LEM of 0.30% p.a). Using the same approach, someone with a 95% LVR mortgage will pay 4.80% p.a. (3.50% p.a. + LEM of 1.30% p.a).
- The interest rates charged by banks for low-deposit mortgages vary considerably - before agreeing to any home loan, compare all the providers to ensure you're getting the best deal.
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Kiwibank
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TSB
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First Credit Union
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ASB
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BNZ
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ANZ
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Westpac
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The Co-operative Bank
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SBS
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NZCU (New Zealand Credit Union)
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NZ Home Loans
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Nelson Building Society
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Be aware of other expenses (and that you’ll need to save more than a 5% deposit to move home)
Buying a home involves a few related costs that you’ll need to budget for. These include:
- Legal fees – you’ll pay conveyancing costs for the transfer of ownership (and checks to make sure everything is legally fine with the property). The costs depend on the lawyer you use (we suggest getting a few quotes) and the complexities of the property. It would be safe to budget at least $1,500 to be safe.
- Registered Valuation – most banks will ask for a valuation for properties being purchased with less than a 20% deposit. A standard valuation can cost anywhere between $400 and $700, and you’ll need to pay it upfront.
- The LMI fee – you’ll pay 1% of the borrowed amount as Lending Mortgage Insurance. If your mortgage is $450,000, you’ll need to either pay $4,500 upfront or have it added to the loan. By paying it upfront, you avoid the interest costs over a 20 to 25 year period. However, most first home buyers choose for LMI to be added to the loan.
- Moving costs – the cost of moving within a town or city will be around $200 to $400, and between towns and cities even more.
- Furniture and fittings – many people move but don’t have everything they need, so allowing $500 for essentials is helpful.
