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Saving a 20% deposit for your first home can feel like an impossible task. For a typical entry-level home, that can mean scraping together well over $120,000 in cash.
This is where the Kāinga Ora First Home Loan scheme steps in. It allows eligible first-home buyers to purchase a house with a deposit as low as 5%. However, this low-deposit entry ticket comes with a specific cost attached: a 1.2% Lender's Mortgage Insurance (LMI) premium.
If you are looking at using the First Home Loan scheme, here is how that fee works, who it actually protects, and why it might still be a very smart financial move.
What is Lender's Mortgage Insurance (LMI)?
When a bank lends you money with only a 5% deposit, they are taking on a higher level of risk. If the housing market drops and a borrower cannot pay their mortgage, the bank could lose money if they are forced to sell the house for less than the outstanding loan amount.
To mitigate this risk, Kāinga Ora acts as an underwriter. They effectively guarantee the loan for the bank: if the borrower defaults and the property is sold at a loss, Kāinga Ora covers the shortfall.
To fund this government safety net, Kāinga Ora charges a 1.2% LMI premium on the loan.
The big misconception: who does LMI actually protect?
How is the 1.2% fee calculated and paid?
The 1.2% premium is calculated on your base loan amount (the purchase price minus your deposit), not the total purchase price of the house.
Why a First Home Loan can still make perfect financial sense
Paying an extra fee to the government might sound frustrating, but utilising the First Home Loan scheme is often a highly effective strategy for two key reasons:
1. Access to discounted interest rates
If you secure a standard low-deposit loan directly through a bank (without Kāinga Ora involvement), the bank will usually charge you a 'Low Equity Margin' (LEM). This is an extra interest rate penalty added to your mortgage rate every single year until you reach 20% equity.
2. Getting ahead of a rising market
Property markets rarely stand still. Paying a 1.2% fee to enter the market today with a 5% deposit is often far cheaper than waiting five years to save a 20% deposit, only to find that house prices have increased and left you behind.
Kāinga Ora First Home Loan LMI calculator
To help you understand exactly how the maths works, we have built the First Home Loan fee estimator below.
This calculator helps New Zealand first-home buyers model a low-deposit scenario. It instantly calculates your base lending requirement and shows exactly how much the 1.2% Kāinga Ora LMI premium will add to your final mortgage balance.
How to use it: Enter your target property purchase price and adjust the deposit slider to match your available cash (whether that is exactly 5% or slightly more). The dashboard will instantly break down the exact structure of your new mortgage, including the base loan and the capitalised 1.2% fee.
