Saving a 20% deposit has long been one of the biggest hurdles facing first home buyers, but National’s proposed changes could make buying with a 5% deposit an option for thousands more Kiwis.
By lifting the First Home Loan income threshold to $300,000, the proposal could significantly widen access to the scheme. But while a 5% deposit could get buyers through the door sooner, there are questions around who will actually benefit, the risks of taking on more debt, and what it could mean for the wider property market.
How Does a 5% Deposit Actually Work?
Banks would generally like buyers to have a 20% deposit. On a $1 million property, that means finding $200,000 upfront and borrowing the remaining $800,000.
However, buyers can already purchase with less than 20%. The trade-off is that they can face higher interest rates because of the smaller deposit.
The First Home Loan scheme works differently. Kāinga Ora underwrites eligible loans, allowing buyers who meet the criteria to purchase with a 5% deposit while still generally accessing the bank’s special interest rates.
The difference in the amount buyers need to save can be significant.
On a $700,000 property:
- A 20% deposit is $140,000.
- A 10% deposit is $70,000.
- A 5% deposit is $35,000.
That $35,000 deposit could potentially already be sitting within a couple’s KiwiSaver. At that point, the question shifts from whether they can build the deposit to whether they can service the mortgage.
Who Could Qualify for a 5% Deposit?
Under the current scheme, the income threshold is $95,000 for an individual and $150,000 for a couple. Those thresholds have not changed since 2022.
National’s proposal would lift the threshold to $300,000, regardless of whether someone is buying alone or with another person.
National says around half of first home buyers now earn more than $146,000, which means the existing threshold is no longer relevant to a significant portion of the market.
More than 33,000 households have used the scheme since 2003, while around 4,000 of the 25,000 first home buyers last year used it.
The proposed change could therefore open the 5% deposit pathway to a much larger group of buyers who currently fall outside the income criteria.
Is the Deposit Really the Biggest Problem?
There are two major hurdles when applying for a mortgage: having the deposit and having enough income to service the debt.
For many prospective buyers, the income is there. The deposit is not.
That is particularly important because buying with a smaller deposit outside the scheme can come with an interest-rate penalty. Depending on the bank and its thresholds, that penalty can be as high as 0.75 percentage points.
If the market rate was 6%, for example, a low-deposit borrower could potentially be paying 6.75%.
The First Home Loan scheme can help remove that penalty while also reducing the amount buyers need upfront.
It also addresses another challenge: time. Someone may be capable of servicing a mortgage today, but saving tens of thousands of dollars more for a deposit can take years.
Do Households Earning $300,000 Need the Support?
A $300,000 household income is significant, which raises an obvious question: should buyers earning that much qualify for government-backed support?
Not every household reaching that income level has necessarily had years to build a deposit.
One example could be two people who have spent time studying or working overseas, returned to New Zealand on higher salaries and have not spent the previous few years contributing to KiwiSaver.
They may have strong incomes but relatively little accumulated savings.
There is also the question of where any income threshold should sit. A household earning $300,000 may need the support less than one earning $180,000, but drawing the line inevitably excludes some buyers who could otherwise service a mortgage but have not yet built the required deposit.
Higher living costs also mean more disposable income is being absorbed by everyday expenses such as petrol and food, leaving less available to put towards a house deposit.
What Are the Risks of Buying With a Smaller Deposit?
A smaller deposit makes home ownership more accessible, but it does not remove the risks.
One potential consequence is increased competition. First home buyer properties are already among the parts of the market seeing activity, and opening the scheme to more households could bring additional buyers into that price range.
The $300,000 income threshold could also allow some first home buyers to compete at price points traditionally occupied by people buying their next home. That could shift competition further up the market.
One alternative raised in the discussion was using a property price cap rather than an income cap. That could focus the scheme specifically on helping people onto the property ladder, regardless of what they earn, while limiting how far up the market the support extends.
There are practical limitations for buyers too.
Applications through the scheme can take longer, and properties requiring substantial work may not qualify. If a property has more than roughly $10,000 of work required to bring it up to market standard, the bank and Kāinga Ora may not be interested in lending against it through the scheme.
There is also the broader risk of taking on more debt simply because a smaller deposit allows your money to stretch further. Being able to purchase with 5% upfront does not remove the need to consider how much debt you are actually taking on.
Could More First Home Buyers Push Property Prices Higher?
Putting thousands more buyers into the market naturally raises questions about what happens to house prices.
The argument in favour of making the change now is that the current market looks very different from 2021.
There are already more first home buyers in the market as a percentage than there have been historically, while there are also more listings and properties that are not selling. In that environment, expanding access to the scheme is not expected to create the same pressure it might have during a rapidly rising market.
Introducing a similar policy at the top of the 2021 market could have added fuel to an already overheated environment.
Today, the view expressed in the discussion was different. More people moving out of flats or their parents’ homes and into homes of their own could support greater household creation and provide activity for both the housing market and wider economy.
The policy could also give some younger New Zealanders another reason to stay in the country rather than move overseas if home ownership suddenly feels more achievable.
Should You Save Longer or Buy Sooner?
One of the most common questions from first home buyers is whether they should keep saving until they reach a 10% or 20% deposit, reducing the amount they need to borrow.
There is no denying that a larger deposit means taking on less debt.
But waiting has its own trade-offs. House prices have softened since 2021, and while savings may currently be able to outpace house price growth, that may not always remain the case.
A 5% deposit potentially gives eligible buyers another option: rather than automatically waiting until they reach 10% or 20%, they can consider whether buying earlier makes sense for their circumstances.
The proposed changes do not make every first home purchase straightforward, nor do they mean every buyer should rush into the market. What they could do is remove one of the biggest barriers for people who can afford the repayments but have struggled to accumulate a large enough deposit.
Key Takeaways
- National is proposing to lift the First Home Loan income threshold to $300,000, whether someone is buying alone or with another person.
- Eligible first home buyers could purchase with as little as a 5% deposit.
- On a $700,000 home, a 5% deposit is $35,000 compared with $70,000 at 10% and $140,000 at 20%.
- Kāinga Ora underwrites eligible loans, helping low-deposit borrowers access more favourable interest rates.
- The proposal could help buyers who have sufficient income to service a mortgage but have struggled to build a larger deposit.
- Smaller deposits mean buyers need to consider the amount of debt they are taking on, not just whether they can get approved.
- Properties requiring significant work may not qualify under the scheme.
- More eligible buyers could increase competition, including at price points beyond traditional first home buyer properties.
- The impact on house prices may depend heavily on market conditions, with the current environment very different from the overheated market of 2021.
- A 5% deposit gives eligible buyers another pathway into their first home, but the numbers still need to stack up for their individual situation.
Next Steps
If you’re a first home buyer considering your options, get in touch with the Lighthouse Mortgages team to understand what you could borrow and whether the First Home Loan scheme could work for you.
If you’d like to watch more, check out this episode below.
For a no obligation discussion to see how we can help you on the path to wealth, please contact us.
Disclaimer:
The information in this article is general information only, is provided free of charge and does not constitute professional advice. We try to keep the information up to date. However, to the fullest extent permitted by law, we disclaim all warranties, express or implied, in relation to this article – including (without limitation) warranties as to accuracy, completeness and fitness for any particular purpose. Please seek independent advice before acting on any information in this article.
