The Reserve Bank doesn’t publish a breakdown of its low-LVR lending (I did ask for it), so that data lumps together all borrowers with less than a 20% deposit, whether they have 19% or 5%.
One bank – BNZ – has been advertising 5% deposit loans recently, but brokers tell me borrowers at the 5% end remain rare, which they attribute to the cost.
The interest rate margins banks add generally get steeper the smaller your deposit.
Kāinga Ora’s First Home Loan scheme is the primary vehicle for 5% deposit home loans, but KO told me that on average, borrowers have a 10.2% deposit.
They underwrote 4041 loans in the 2025 financial year – 31% more than the year prior.
Buying with a smaller deposit can be a great way to take advantage of current market conditions and surmount what is often the biggest hurdle to getting on the property ladder – but it’s not without its risks.
If you’re diving into the market as a low-deposit first-home buyer right now, here are a few things to think about.
Be prepared for your loan to cost more
Even though it might seem unfair, if you have less than a 20% deposit, you will usually pay higher interest rates than someone who is over that threshold. It reflects the greater risk associated with the loan.
As I’ve detailed in a previous column, low-equity fees or margins are typically charged, and/or some banks only offer their more expensive “standard” interest rates rather than their “special” rates to low-equity borrowers.
The result can be thousands of dollars over the course of the year. If you were borrowing $500,000, there could be between $1500 and $10,500 extra interest per year, depending on the bank and your equity position.
Generally, the smaller the deposit, the higher the margin.
If you have the option of choosing a bank, compare their low-equity policies to see which one might work best for you.
Consider your interest rate strategy carefully
Those premiums present a bit of a conundrum when choosing how to structure your lending.
Typically, with fixed interest rates rising as they have been, borrowers – especially brand-new ones – want the security of longer-term rates, so they know what they’re in for.
But Squirrel mortgage adviser Adam Clark says that presents contrasting priorities for low-deposit borrowers because, “Ideally you want to fix short term so that you can jump from 5% to 10% equity etc.”
That’s because as you increase your equity, you may be eligible for the low-equity premiums to be removed or reduced, which you’d want to take advantage of as quickly as possible. However, most banks will only do that when your fixed rate expires (and may also require a valuation).
“It can make for some really tough decisions about how best to proceed,” Clark says.
If you’re not close to moving into a different equity bracket, it’s not a concern – but if you are, compare potentially higher future interest rates with the impact of reducing your low-equity margin sooner.
Be aware there are fewer backstops
Clark also makes the very good point that there are fewer get-out-of-jail-free cards available to you as a low-deposit borrower if you strike financial difficulty.
Options banks generally consider in financial hardship situations include temporarily moving to interest-only repayments or offering a repayment deferral.
However, Clark says when you have low equity it “gives the banks less flexibility to offer this type of relief, as the lower equity means the bank is less able to protect themselves in the event of a mortgagee sale [if it came to that]”.
That is where it might be worth considering whether personal insurance has a role to play in protecting your financial position if life were to throw you a curveball.
Don’t assume the only way is up
As we’ve been reminded over the past few years, it’s unwise to assume property prices will only move in one direction.
Past property cycles have delivered homeowners significant capital gains, at a pace that would see a low-equity buyer pass that critical threshold of 20% without having to do a thing.
But the market, for now at least, doesn’t appear poised to skyrocket.
So, capital gains will not quickly deliver the increase in equity that would allow low-equity premiums to be removed or reduced.
That leaves you with two options within your control – increase the value of the property by improving it or pay off debt.
Or there’s potentially a third option – keep saving hard before diving in. It’s worth doing the numbers on how much you might save by increasing your deposit and being able to access cheaper rates.
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