How to Buy a House with a Small Deposit

It’s been a tough few years for first home buyers (FHBs). First, house prices soared, due to pandemic-induced low interest rates. Then, as a consequence of rising inflation, mortgage rates more than doubled.

In August 2021, the average one-year fixed rate for owner-occupiers on Canstar’s mortgage database was 2.58%. At time of writing (28/07/23), the same rate is now 7.19%.

FHBs trying to save for a deposit and afford a mortgage face Herculean tasks. But that hasn’t stopped young Kiwis achieving their dreams of property ownership.

The latest Reserve Bank figures show, over the past year, while the number of mortgages issued to owner-occupiers and investors dropped, -5% and -12% respectively, new FHB loans increased, up 15%.

However although interest rates and house prices remain high, at least the Reserve Bank has relaxed its loan-to-value (LVRs) restrictions. Since June, the percentage of mortgages banks have been able to grant to applicants with deposits of less than 20% of a home’s price has increased to 15% of their total lending, up from 10%.

So what are LVRs, and what assistance is there to help FHBs with small deposits? Canstar explores:

What is an LVR

An LVR represents how much deposit is needed compared to the size of the loan required to purchase a property. If you want to buy a house for $1 million and the bank requires an LVR of 80%, you’ll need a 20% deposit: $200,000.

The rules were introduced in 2013 by the RBNZ in an attempt to cool the overheated property market. Over the years, the LVR restrictions have been tweaked, and they were removed entirely in response to the economic impact of the pandemic. But at the beginning of 2021, the LVR restrictions were reinstated.

Currently, the LVR rules mean that most prospective owner-occupiers need a 20% deposit to secure a property. However, lenders are still allowed to lend beyond the LVR of 80% for up to 15% of their mortgages. So that doesn’t mean you must have a 20% deposit to buy a home.

Banks are still able to accept low-deposit applications

Even with the LVR restrictions in place, banks are still able to process low-deposit home loans. They are just limited to 15% of their new lending.

If you’ve a good income and a secure job, and can prove to a lender that you’ve a solid financial head on your shoulders, you could still find a lender willing to grant you a mortgage.

And it’s not like every FHB is competing for a low-deposit loan. The latest RBNZ mortgage figures show that most recent FHBs (69%) had a deposit of at least 20%.

NB: It’s also worth noting that only registered banks in NZ have to adhere to the LVR rules. Non-bank lenders can set their own limits, although many non-bank lenders charge higher interest rates than the big banks.

In addition to the continued availability of low-deposit loans, there are some other ways to secure a mortgage with a low deposit:

• New building exemption
• First Home Loan
• Housing association support
• KiwiSaver First Home Grant
• Bank of Mum and Dad
• Squirrel: Launchpad

New building exemption

Loans to those building a new home are exempt. If you buy at an early stage of construction, or buy from a developer within six months of completion, the LVR rules will not apply to your loan application.

Currently, many smaller townhouses and apartments are being built. And these provide a great opportunity for Kiwis with smaller deposits to purchase first homes.

→ Related article: How Much to Build a New House in NZ?

Cheapest Home Loan Rates for First Home Buyers

The table below displays some of the 1-year fixed-rate home loans on our database (some may have links to lenders’ websites) that are available for first home buyers. This table is sorted by current interest rates (lowest to highest), followed by company name (alphabetical). Products shown are principal and interest home loans available for a loan amount of $500K in Auckland. Before committing to a particular home loan product, check upfront with your lender and read the applicable loan documentation to confirm whether the terms of the loan meet your needs and repayment capacity. Use Canstar’s home loan selector to view a wider range of home loan products. Canstar may earn a fee for referrals.

Compare Cheapest Home Loan Rates for First Home Buyers

First Home Loan

A First Home Loan is a special home loan for first home buyers, one that only requires a 5% deposit. First Home Loans are underwritten by Housing New Zealand (a government corporation) and are issued by several lenders. These include: Westpac, TSB, Kiwibank, The Co-Operative Bank, and SBS Bank.

However, as with the First Home Grant, First Home Loans do come with strings attached:

• Earn $95,000 p.a. or less as an individual buyer/$150,000 p.a. if you have dependents, either individually or as a couple
• You need to pay a 0.5% lender’s mortgage insurance levy, which can be built into the loan

For more information on the First Home Loan scheme, check out our story: What is the First Home Loan?

Housing association support

Housing associations such as the New Zealand Housing Foundation allow you to buy part of a house but live in the whole dwelling. Similar to owning the house outright, the deal is rent-free.

You organise your mortgage with a standard home loan lender with support from the Housing Foundation. Then ownership is shared with the association until you have the money to buy the whole house.

The system offers some flexibility because you can increase your percentage of ownership whenever it suits. And, if you need to break from the deal, you can sell your share in the house.

Better yet, there is no fee on the share that the housing association owns. The Housing Foundation support arrangement is a great way to own equity if you don’t have the money to buy an entire home.

KiwiSaver First Home Grant

If you’re a FHB putting KiwiSaver funds towards buying a home, and you meet certain criteria, including income levels, you could also access a First Home Grant.

The First Home Grant is available to FHBs who have been contributing at least the minimum amount to KiwiSaver for three years or more. It providers eligible FHBs with:

• a grant of up to $5000 for individuals and up to $10,000 for two or more eligible buyers to put towards the purchase of an existing/older home
• a grant of up to $10,000 for individuals and up to $20,000 for two or more eligible buyers to help with the costs of purchasing a brand new home

You receive $1000 for each year you have been a KiwiSaver member, up to a total of five years. This means you could get $3000, $4000, or $5000 to put towards a deposit. If you’re buying a new build the grant doubles to $2000 per year.

Note: regional price caps still apply for homes available to purchase under the First Home Grant scheme. You can get more details from the Kāinga Ora website here.

Bank of Mum and Dad

In the past, there was a stigma attached to calling on the Bank of Mum and Dad. But, in today’s economic climate, it’s definitely become a more widely accepted way of financing a home. If you’re lucky enough to have parents who are in a position to help you with a deposit, it’s an opportunity hard to pass up. They can either provide cash, or put up the equity in their home to help you get into yours.

Just be aware that many banks will still require evidence that you have saved at least some of the deposit yourself. This is because if you’ve not been able to save anything towards a deposit, lenders will be concerned about your ability to meet your mortgage repayments.

→ Related article: Buying A First Home? The Bank of Mum and Dad Can Help!

Squirrel: Launchpad

Squirrel’s Launchpad product is an innovative alternative to saving for a deposit. If you can save a 5% deposit, a Launchpad mortgage will effectively lend you the rest.

To get around the LVRs, Launchpad lets you borrow the rest of your 20% deposit (15% of the home’s value) as a personal loan. The other 80% is a regular mortgage. Be aware that, like all personal loans, the 15% deposit top-up comes with higher interest rates: 10.45% p.a. over 5 years. However the loan is structured so your repayments go to paying off that part of your debt first.

The amount you can borrow depends on the price of the house you’re looking to purchase:

→ Related article: Squirrel’s Launchpad: Helping Kiwis into First Homes

Cheapest Home Loan Rates for First Home Buyers

The table below displays some of the 1-year fixed-rate home loans on our database (some may have links to lenders’ websites) that are available for first home buyers. This table is sorted by current interest rates (lowest to highest), followed by company name (alphabetical). Products shown are principal and interest home loans available for a loan amount of $500K in Auckland. Before committing to a particular home loan product, check upfront with your lender and read the applicable loan documentation to confirm whether the terms of the loan meet your needs and repayment capacity. Use Canstar’s home loan selector to view a wider range of home loan products. Canstar may earn a fee for referrals.

Compare Cheapest Home Loan Rates for First Home Buyers

The final word on low-deposit mortgages

Finally, a word of warning. If you borrow more than 80% of the value of a home, not only are you likely to be charged a higher rate of interest on your mortgage, you could also be subject to a hidden cost called a low equity premium (AKA lenders’ mortgage insurance or mortgage indemnity insurance). If you can persevere and keep saving, it may be worth it to avoid this extra fee.

→ Related article: Low Deposit Home Buyers Beware of the Low Equity Premium

About the author of this page

This report was written by Canstar’s Editor, Bruce Pitchers. Bruce has three decades’ experience as a journalist and has worked for major media companies in the UK and Australasia, including ACP, Bauer Media Group, Fairfax, Pacific Magazines, News Corp and TVNZ. Prior to Canstar, he worked as a freelancer, including for The Australian Financial Review, the NZ Financial Markets Authority, and for real estate companies on both sides of the Tasman.