Budget Blow for First Home Buyers
The New Zealand government’s recent Budget 2025 announcement delivered a significant blow to first home buyers hoping to take advantage of the Kainga Ora First Home Loan programme. One of the major changes was a fairly big hike in the Lender's Equity Premium (LEP) - from 0.5% to 1.2% of the loan amount.
While this might sound like just another small adjustment in government policy, it has real consequences for low-deposit first home buyers…
WHAT IS A LENDER’S EQUITY PREMIUM?
When buying a home with less than a 20% deposit, most banks and lenders apply either a Low Equity Premium (LEP) or a Low Equity Margin (LEM) to the mortgage.
LEP is a one-off fee, calculated as a percentage of your total loan.
LEM is an extra interest margin added on top of your regular home loan rate - essentially increasing your ongoing repayments until your equity reaches 20%.
Each lender treats this differently, but either way, it’s the ‘cost’ of having a lower deposit (because you essentially pose a higher risk to the lender).
WHY WAS THE PREVIOUS KAINGA ORA STRUCTURE SO HELPFUL?
One of the big drawcards of the Kainga Ora First Home Loan programme was that borrowers with as little as 5% deposit could access the same sharp interest rates as someone with a 20% deposit. This could tally up to thousands in savings over the first few years of a mortgage.
Instead of paying that ongoing Low Equity Margin we outlined above, Kainga Ora applicants would only pay a small upfront 0.5% LEP, which made it a cost-effective solution for many.
But with the government’s newly-imposed 1.2% LEP, the numbers start to look very different…
OK, SO WHAT DOES THIS CHANGE MEAN?
Let’s break it down with an example. Say you're borrowing $600,000
Old LEP (0.5%) = $3,000
New LEP (1.2%) = $7,200
That’s a $4,200 increase - a significant extra cost to cover, usually paid upfront or added to your mortgage!
For many first home buyers already stretched to put a mortgage deposit together, this change makes the Kainga Ora First Home Loan far less attractive.
In fact, it may now be cheaper to go directly through a main bank - even if they apply a Low Equity Margin - because at least that spreads the cost over time instead of requiring it upfront.
A CLOSER LOOK AT LOW DEPOSIT LOAN PRICING
When ‘pricing up’ mortgages for borrowers with less than 20% deposit, some banks charge a one-off Low Equity or Lenders Mortgage Insurance Premium, while others apply a Low Equity Margin - an additional interest rate added to the standard rate. On top of that, some lenders also offer less competitive base rates for low-deposit borrowers, further increasing the long-term cost.
It’s important to know that Low Equity Margins aren’t necessarily permanent. Once you reach 20% equity in your property, many banks will allow you to remove or reduce that margin - but they don’t do this automatically. You’ll need to request the change, either directly or through your mortgage adviser.
To do this, you typically need to provide evidence of your property's current value. This might require a full registered valuation, or in some cases a desktop valuation may be acceptable depending on the lender and circumstances.
THE CATCH-22
All main banks are currently accepting mortgage applications for clients with 10–20% deposits, and some actually offer decent low equity options.
However, if you only have 5–9% deposit, Kainga Ora is still the only viable option - but now, with the government’s Budget 2025 change, this option comes at a much higher cost.
This puts low-deposit borrowers in a difficult position:
Either pay a large upfront premium through Kainga Ora,
Or struggle to find a lender willing to help at all without 10% deposit.
MY FINAL THOUGHTS
With this LEP increase, Kainga Ora’s First Home Loan has gone from a leading low-deposit option to a costly compromise.
It’s no longer the no-brainer it used to be.
If you’re unsure which will be better for you - Kainga Ora, Low Equity Premium, or Low Equity Margin - we’re here to help you compare mortgage options. Every bank structures these costs differently, and the right advice can save you thousands.
Our blog is not intended to be taken as personal advice and is for informational purposes only.
Before acting on this information, contact our mortgage broker to ensure it is suitable for your circumstances.