First-home buyers to pay more as government withdraws insurance support
First-home buyers using Kāinga Ora’s First Home Loan scheme will soon face a higher cost, with the mortgage insurance premium increasing from 0.5% to 1.2% of the loan amount on applications submitted after July 1.
The scheme, which helps eligible buyers secure a mortgage with just a 5% deposit, operates outside standard bank loan-to-value restrictions. Borrowers can often access special interest rates and avoid low-equity fees and margins that usually apply to small-deposit loans.
A Ministry of Housing and Urban Development (HUD) spokesperson confirmed the government will stop contributing to the mortgage insurance premium from July as part of budget 2025, RNZ reported.
“This change is expected to generate savings of $17.9 million per annum from 2025/26 onwards,” they said.
“These savings, along with others identified across the housing portfolio, will be fully reprioritised to support both existing housing services and the delivery of new initiatives within Vote Housing and Urban Development, including investments in social housing, transitional housing, and housing support services.”
The change follows the government’s earlier decision to discontinue the First Home Grant in May 2024, which previously offered up to $10,000 to eligible buyers. Together, these moves reflect a shift away from upfront housing subsidies toward reallocation of funds into social housing support.
Buyers face thousands more in upfront or added costs
HUD said the change will increase the premium on a $550,000 loan from $2,750 to $6,600.
“This cost can be paid upfront or added to the loan, which would increase the total borrowing by approximately $3,850,” it said.
“HUD does not expect that moving to a full cost recovery model will materially affect the uptake of first home loans or households’ ability to reach homeownership relative to current settings.
“The increase in cost is less than 1% of the average loan value and is not expected to significantly impact borrowers' ability to service their mortgage, meet deposit requirements, or access lending.”
Brokers say cost rise is modest but poorly communicated
Mortgage experts said the change, while not financially crippling, came without much warning, RNZ reported.
“It was a change that was ‘snuck in’,” said David Cunningham (pictured left), chief executive at mortgage advice firm Squirrel. “On a $400,000 loan that lifts the LMI from $2,000 to $4,800. Whilst the $2,800 difference seems big, it is just part of the cost of establishing homeownership.
“Changes to interest rates are a much bigger factor as they impact every year rather than a one-off. With interest rates about 1.5% lower than they were a year ago and house prices a bit lower, first-home buyers are in a better position than a year ago, despite this change.”
Advisers explain how First Home Loan still stacks up
While some are concerned about the surprise change, advisers say the First Home Loan scheme still has value.
“I've done a heck of a lot of Kāinga Ora First Home Loans over recent years … a 0.5% fee was typically a no-brainer even when clients could have been approved with their main banks [with a] low deposit outside the scheme,” Jeremy Andrews (pictured centre), mortgage adviser at Key Mortgages, told RNZ.
“There are still cases where it makes sense, as that’s a one-off fee rather than typical ongoing margin until clients reach the sweet spot of 20% equity.
“It’s also ironically the same 1.2% margin that BNZ charges their existing ‘main bank’ clients with between 5% [and] under 10% deposit. BNZ, like most other banks, charges an ongoing low equity margin every year until clients can prove they have 20% deposit – and this might require an updated valuation to do so.”
Andrews added that Kāinga Ora loans can still provide pre-approval options, cashbacks, and flexible assessment criteria.
“There are several different lenders who can provide pre-approval with Kāinga Ora First Home Loans, each with pros and cons, such as considering either one or two boarders if applicable, turnaround time differences and varying rates and cashbacks,” he said.
Main banks pull back on low-deposit pre-approvals
Outside the scheme, borrowers with low deposits are finding it harder to get pre-approved.
“The main banks were generally not issuing pre-approvals for low-deposit borrowers not part of the First Home Loan scheme at the moment,” Karen Tatterson (pictured right), mortgage adviser at Loan Market, told RNZ.
“It means that the only time you can get an approval is if you are under contract on a property or going to auction on a specific property.
It does cause a concern for first-home buyers as they cannot go to the market armed with a pre-approval, and this creates some nervousness for them. The key is good advice and ensuring they speak to an adviser, so they know their numbers.”
