Buying your first home is an exciting achievement for many New Zealanders. However, saving a 20% deposit when rents are high and food and lifestyle costs are at record levels can feel like an insurmountable obstacle, especially for first-home buyers working with a limited budget.

The good news is that home ownership with a 5% deposit is possible.

Keep reading if you’re eager to stop paying rent and start building equity. I’ll provide some tips and insights from my experience as a mortgage broker that aims to put you on a pathway to purchasing your first home.

The challenges of low deposits

Buying your first home with a 5% deposit has some challenges. With less equity invested upfront, your mortgage payments will be higher, and it may require more budgeting and financial discipline to afford your new home.

Before I discuss the benefits of low-deposit mortgages, let’s examine some of the key difficulties first-time home buyers face.

Higher interest rates

Lenders consider low down payment loans riskier, so they charge higher interest rates to compensate, even if they think you can afford the repayments.  This is known as a ‘low equity margin’ (LEM). Typically, a 5% down the mortgage will have an interest rate around 0.5-1% higher than a 20% down loan. Over the life of the loan, that can add up.

Working with an experienced mortgage advisor can help you shop around for the best rates.

Mortgage insurance requirements

With less than 20% down, some lenders require private mortgage insurance (PMI). This adds an extra monthly cost to protect the lender if you default. PMI typically ranges from 0.3 to 1.5% of the total annual loan amount.

The benefits of 5% home deposits

While low deposits were rare, alternative lenders now offer more than 5% and 10% deposit options. This makes buying your first home more accessible if you have limited savings but stable income.

Key benefits of 5% deposit mortgages include:

More affordable entry point

With lower deposit requirements, you don't need as much money upfront to buy. This allows first-time buyers to enter the market sooner rather than spending years saving a 20% deposit.

Build equity faster

While your loan amount will increase, you start building home equity immediately as you pay the mortgage. A lower deposit means more of your monthly payment goes towards the principal.

Establish credit

Successfully managing a mortgage builds your credit profile for future loans. This helps when you look to refinance or purchase your next home.

KiwiSaver First Home Withdrawal

After being a KiwiSaver member for at least three years, you can make a one-time withdrawal of your KiwiSaver funds (except $1,000) towards buying your first home. There are certain eligibility criteria, but this can give you a nice boost to your deposit funds.

First Home Loan through Kainga Ora

One of the most significant benefits for first-time home buyers with a low deposit is the First Home Loan programme through KaingaOra, designed to make it easier for individuals to purchase their first home by lowering the required deposit to 5%.

Depending on your income and location, this government grant can give you $3,000, $4,000, or $5,000, depending on whether you’ve contributed to KiwiSaver for three, four, five, or more years. If you’re buying a new-build home, the amounts double, which means the grant can be up to$10,000.

The process is simple:

1.      Check your eligibility for the First Home Loan

2.      Work with us to process your application

3.      Submit your application to your preferred lender for assessment

4.      Receive your approval and start searching for your first home!

Tips for qualifying for a 5% mortgage

Here are some tips to improve your chances of getting approved for a mortgage with just a 5% down payment:

Stable job and income

Provide several years of stable employment history in the same field. Bonus points if you have an upward career trajectory. Avoid changing jobs or gaps in employment right before applying.

Budget carefully

Document how you spend your current income to show how you'll afford mortgage payments. Avoid taking on new debts and reduce spending if possible. Highlight any areas where you can trim expenses if needed.

In addition to your down payment, aim to have 3-6 months of mortgage payments saved as an emergency fund. This cushion will help you continue making payments if you face a job loss or unexpected expenses.

Choose an affordable property

Opt for a home well within your price range, avoiding maxing out your approval amount. This shows you can comfortably handle the monthly payments.

Pick the right mortgage

Work with an experienced mortgage broker to select the mortgage product that best fits your financial profile. Options like 5% or 10% deposits each have their own requirements.

Partnering with experts

At Benchmark Mortgages, we have in-depth knowledge of various lender policies, products, and qualifications. Rather than researching multiple banks and lenders, let an expert broker compare options on your behalf.

We have established relationships with various lenders and can match you with the ones most likely to approve a 5% loan. We will save you time by managing the application and approval process. Our negotiating ability can also help you get the best interest rates and terms while advising you on the documentation, budgeting, debt levels, and savings needed to qualify and set yourself up for mortgage success.

Don't let a low deposit hold you back. We make affordable homeownership achievable. Reach out for a free consultation today to get the process started.

Your Kiwi dream home could be yours sooner than you think.

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