Budget change may cost first home buyers thousands
By Susan Edmunds of RNZ
First-home buyers accessing the Kainga Ora-administered First Home Loan will pay a higher fee from 1 July.
The scheme allows borrowers to access loans with a deposit as small as 5 percent, if they earn less than $95,000 as an individual without dependents or $150,000 as a couple or single parent.
These loans do not fall under the banks' loan-to-value rules and borrowers can usually access bank special rates and do not have to pay the low-equity fees and margins that could otherwise apply.
Previously, borrowers had to pay lenders mortgage insurance of 0.5 percent of the loan amount. But from 1 July, that increases to 1.2 percent.
Borrowers can pay it upfront or over the lifetime of their loans.
The change applies to loans submitted after 1 July.
A spokesperson for the Ministry of Housing and Urban Development said the government had agreed to cease its contribution to the mortgage insurance premium as part of the Budget.
"This change is expected to generate savings of $17.9 million per annum from 2025/26 onwards. 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 ministry said for an average first home loan of $550,000 it would increase the premium paid by the borrower from $2750 to $6600.
"This cost can be paid upfront or added to the loan, which would increase the total borrowing by approximately $3850.
"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 home ownership relative to current settings. The increase in cost is less than 1 percent of the average loan value and is not expected to significantly impact borrowers' ability to service their mortgage, meet deposit requirements, or access lending."
David Cunningham, chief executive at mortgage advice firm Squirrel, said it was a change that was "snuck in".
But he said it would not make a big difference to most borrowers.
"On a $400,000 loan that lifts the LMI from $2000 to $4800. Whilst the $2800 difference seems big, it is just part of the cost of establishing home ownership. 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 percent 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."
There were just over 5500 First Home Loans approved last year.
Jeremy Andrews, a mortgage adviser at Key Mortgages, said the change had come as a surprise.
"I've done a heck of a lot of Kainga Ora First Home Loans over recent years … a 0.5 percent fee was typically a no brainer even when clients could have been approved with their main banks [with a] low deposit outside the scheme.
"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 percent equity.
"It's also ironically the same 1.2 percent margin that BNZ charges their existing 'main bank' clients with between 5 percent under 10 percent deposit. BNZ, like most other banks, charges an ongoing low equity margin every year until clients can prove they have 20 percent deposit - and this might require an updated valuation to do so."
He said a benefit of the First Home Loan scheme was that people could usually be preapproved and it was sometimes possible to get higher cashbacks from banks.
"There are several different lenders who can provide preapproval with Kainga 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. "
Karen Tatterson, Loan Market mortgage adviser, said the main banks were generally not issuing pre-approvals for low-deposit borrowers not part of the First Home Loan scheme at the moment.
"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 preapproval and this creates some nervousness for them. The key is good advice and ensuring they speak to an adviser so they know their numbers."
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