Banks write $1.26bn low-deposit loans as FHBs pay LEM premiums

New Zealand banks wrote $1.261 billion of new residential mortgages at loan-to-value ratios above 80% in July 2026, Reserve Bank of New Zealand C31 data show. That is roughly double the about $640 million recorded in July 2019.

First-home buyers accounted for $850 million of the high-LVR total. Other owner-occupiers took $381 million. Investors took only $29 million.

Total new residential mortgage commitments were $7.853 billion. High-LVR lending was about 16.1% of the flow.

Banks are using a real slice of their LVR allowance. They still charge for the risk. Low-equity margins and denial of special rates lift the cost for thin-deposit buyers on day one.

The cost on a typical FHB loan

Interest.co.nz put the average first-home buyer mortgage in July at $578,331. The estimated average purchase price was about $679,700 — the softest in almost a year.

On a $580,000 loan, a 0.30% low-equity margin costs about $1,740 a year, or roughly $145 a month ($67 a fortnight). A 0.75% margin costs about $4,350 a year, or $363 a month ($167 a fortnight). A 1.50% margin costs about $8,700 a year, or $725 a month ($335 a fortnight).

Those add-ons sit on top of standard rates. Special one-year offers near 4.9–5.0% in early September 2026 generally require LVR of 80% or below. High-LVR borrowers usually cannot access them.

Westpac’s published bands illustrate the ladder: +0.25% at 80.01–85% LVR, +0.75% at 85.01–90%, +1.50% at 90.01–95%, and +1.75% above 95%. ASB’s mid-2026 bands, as compiled by Canstar, run about 0.30%, 0.75%, 1.30% and 1.50% across the same steps. Some lenders, including ANZ and Kiwibank, price higher standard rates instead of a separate LEM line.

Margins are usually removable once equity reaches 20% after a valuation. Until then the bank earns a wider spread on the higher-risk slice of the book.

Who took the high-LVR flow

Of July’s $1.261 billion above 80% LVR, first-home buyers supplied about two-thirds. That $850 million was roughly 54% of all FHB lending by value ($1.580 billion total FHB commitments).

Interest.co.nz estimated 49.2% of the 2,732 new FHB mortgages in July were low-equity. FHB mortgage numbers were down 9.5% on July 2025. FHBs still made up one-third of residential-purpose approvals by number.

Cotality reported first-home buyers at a record 29% of purchases in July even as overall sales softened. Absolute high-LVR dollars remain elevated. Transaction counts and total commitments are not.

Regulatory room, bank buffers

From 1 December 2025 the RBNZ lifted the owner-occupier high-LVR speed limit to 25% of new lending above 80% LVR, from 20%. The investor limit rose to 10% of new lending above 70% LVR, from 5%.

Debt-to-income rules have applied since 1 July 2024: no more than 20% of owner-occupier lending may exceed 6× gross income, and no more than 20% of investor lending may exceed 7×. On 14 August 2026 the Financial Policy Committee left LVR and DTI settings unchanged. Assistant Governor Angus McGregor cited flat house prices, modest credit growth and contained housing risk.

Banks typically hold internal buffers several points under the formal caps. Actual owner-occupier high-LVR shares have run well below 25%. Kāinga Ora First Home Loans (minimum 5% deposit, income-capped, underwritten by Kāinga Ora) and eligible new-build loans sit outside the LVR speed limits.

Soft volumes meet a tighter OCR

RBNZ key points show total new commitments fell 7.0% month-on-month in July to about $7.9 billion and were down 13.1% year-on-year. Average new loan value fell to $369,256. The OCR was raised to 2.50% in July 2026, with further tightening priced in markets at the time.

High-LVR stock is still a small share of the book. RBNZ LVR positions put existing lending above 80% LVR at 9.6% of a $392.6 billion residential book at end-Q1 2026. Flow risk and stock risk are not the same thing — but loss-given-default rises when equity is thin and prices soften.

Cotality has already flagged several thousand peak-era first-home buyer households in negative equity even under a generous 20% original-deposit assumption. Many recent entrants put down less. Rising refix rates extend the period spent above the special-rate threshold.

Mortgage advisers stress serviceability first, then security. Clean account conduct, limited consumer debt and a documented savings trail improve approval odds inside bank risk appetite. High LVR is treated as temporary: pay principal faster, refinance or seek margin removal at 20% equity.

What the $850m means for the banks

For ANZ, ASB, BNZ, Westpac and Kiwibank the July FHB high-LVR flow is higher-yielding volume inside a regulated quota. Each bank manages rolling compliance windows and internal buffers. LEMs and special-rate exclusion protect net interest margin against higher expected loss and higher risk-weighted assets on thin-equity loans.

Non-bank channels and brokers capture complexity fees because low-deposit files fail first-pass more often. Deposit formation remains the binding constraint in Auckland, where entry prices of $850,000–$1 million imply a 20% deposit of $170,000–$200,000.

Over the next 12–24 months the mix of LVR room, DTI caps, the OCR path and house prices will decide whether low-deposit lending stays an entry valve or feeds household stress and bank provisioning. The RBNZ does not yet treat the flow as a stability threat. The pricing on the term sheet already says the risk is not free.