First-Home Buyers Dominate Low-Deposit Lending as DTI Caps Lie Dormant

First-Home Buyers Command the High-LVR Allocation

First-home buyers have cemented their standing as the primary users of low-deposit home financing across New Zealand. According to the latest mortgage figures from the Reserve Bank of New Zealand (RBNZ), entry-level purchasers represent nearly two-thirds of all owner-occupier residential lending written at a loan-to-value ratio (LVR) above 80 percent. The figures highlight an entrenched structural dynamic: existing property owners and investors are sitting largely on established equity buffers, leaving low-equity allowances almost entirely to buyers stepping onto the housing ladder for the first time.

Under current RBNZ macroprudential rules, retail banks operate under an LVR speed limit that caps low-deposit owner-occupier lending. In recent periods, low-equity activity has expanded as lenders use their permitted capacity to compete for new customers. Monthly new commitments to first-home buyers have regularly surpassed $1.4 billion, with more than half of that dollar volume extended to borrowers holding deposits below the conventional 20 percent threshold. While second-steppers and upsizers generally rely on capital gains from past sales to meet equity standards, first-home buyers rely heavily on low-deposit exemptions, personal savings, KiwiSaver withdrawals, and government-backed schemes.

DTI Restrictions Remain Practically Ineffective

While low-deposit borrowing continues at scale, the RBNZ framework introduced on 1 July 2024 to cap leverage across personal incomes remains largely idle. The debt-to-income (DTI) rules establish explicit speed limits on bank balance sheets:

• Up to 20 percent of new lending to owner-occupiers can exceed a DTI ratio of six times gross income.
• Up to 20 percent of new lending to property investors can exceed a DTI ratio of seven times gross income.
• Exemptions apply to new builds, loan refinancing without increased principal, and porting existing facilities.

RBNZ dataset C40 tracks residential mortgage commitments against borrower income, revealing that high-DTI originations remain near historical lows. Total new lending to owner-occupiers above a DTI of six hovers well below 5 percent of total gross bank issuance. This leaves the 20 percent regulatory ceiling untouched and largely irrelevant to everyday bank approvals. Rather than operating as a live brake on household borrowing capacity, the regime functions as a dormant safeguard.

The Math Behind Bank Serviceability Rates

The explanation for this lack of binding power comes down to retail bank credit policy. When an applicant seeks a mortgage, lenders assess repayment capacity not at advertised headline rates, but at elevated serviceability test interest rates. Throughout 2024, 2025, and into 2026, test interest rates across the banking system have consistently operated between 7.50 percent and 8.75 percent.

These stress-testing calculations test household budgets under assumptions of significantly higher living expenses and interest costs. An illustrative example demonstrates the mechanics:

• A dual-income household earning a combined gross income of $160,000 seeking an owner-occupier mortgage of six times income would need to borrow $960,000.
• Assessed at an 8.00 percent serviceability rate over a 30-year amortisation period, that loan demands annual principal and interest payments approaching $84,500.
• After income tax, ACC levies, KiwiSaver contributions, living expense baselines, rates, and insurance, net household cash flow is insufficient to clear standard bank serviceability hurdles.

As a direct result of these affordability calculations, applicants run out of uncommitted monthly income well before their proposed borrowing hits six times their annual earnings. Bank serviceability criteria cut off borrowing at roughly 4.5 to 5.2 times income, locking DTI metrics at modest levels without any intervention required from macroprudential rules.

How Major Lenders Allocate Credit

Market activity among the largest mortgage lenders reflects this split between LVR flexibility and DTI compliance. ANZ Bank New Zealand, the country’s single largest mortgage book holder, continues to channel its high-LVR allowances into qualified first-home buyers while pricing the added credit risk through standard low-equity fees or margins. The bank evaluates borrowing through strict uncommitted monthly income models, meaning loan approvals rarely approach macroprudential DTI ceilings.

State-owned Kiwibank has taken an aggressive stance in courting entry-level borrowers, partnering with Kāinga Ora First Home Loan programmes to provide lending at deposits as low as 5 percent. Kiwibank directs its high-LVR quota straight toward first-home applicants who satisfy underwriting tests but lack substantial accumulated wealth. Like ANZ, Kiwibank reports negligible lending at DTIs above six, as internal debt serviceability buffers prevent customers from reaching those upper boundaries.

Policy Intent versus Market Reality

The Reserve Bank has acknowledged that DTI settings were never designed to restrict lending during periods of higher interest rates. In multiple technical papers and financial stability reports, the central bank clarified that DTI caps act as structural guardrails for future economic cycles. In a low interest rate environment, low debt servicing costs allow buyers to bid up house prices by taking on seven, eight, or nine times their household earnings, as observed during the 2020-2021 market surge. In that environment, LVR restrictions alone cannot prevent debt-to-income expansion if asset values rise rapidly.

By installing the DTI framework while test rates were elevated, the RBNZ established infrastructure in advance of the next monetary easing phase. As retail interest rates drift lower over the medium term and serviceability test rates follow, borrower debt capacities will naturally climb. Only when test rates decrease enough for borrowers to qualify for loans above six times income will the RBNZ speed limit become a binding restriction on bank underwriting.

Strategic Implications for Borrowers and Lenders

For current property participants, this policy reality clarifies several practical rules of engagement:

• First-home buyers do not need to fear immediate rejection from regulatory DTI caps, because internal bank expense audits and interest test buffers determine borrowing limits first.
• Securing low-deposit pre-approvals requires early engagement, as retail banks closely manage their high-LVR speed limits to prevent regulatory breaches.
• Property investors face high structural barriers, including a stricter standard LVR threshold alongside a dormant seven-times DTI cap that will constrain portfolio scaling when interest rates drop.

New Zealand’s lending environment remains defined by two distinct speeds. First-home buyers are actively consuming low-deposit credit allowances with the full support of major trading banks. At the same time, the broader mortgage sector is operating well beneath macroprudential income ceilings, waiting for lower borrowing costs to activate rules that currently exist only on paper.