Forty-five percent of first home buyers' mortgages were low equity loans in October

The average price first home buyers are paying to get into a home is increasing, but so is the amount of debt they are taking on to make the purchase.

Interest.co.nz estimates the average price paid by first home buyers in October was $690,000.

The estimated average price paid by first home buyers peaked at $718,000 in April 2022, then steadily declined to $656,000 in May last year and has been rising reasonably steadily since then.

However, the latest rise in the prices means they are taking on more debt.

According to the latest Reserve Bank figures, the average size of the mortgages approved to first home buyers has increased from $548,000 when purchase prices were at their recent low point in May last year, to $584,000 in October this year. That's almost back to the record high average loan of $595,000 at the height the pandemic-driven boom in May 2022.

Running parallel with the increase in the amount being borrowed, is a relentless increase in both the number and percentage of first home buyers taking out low equity mortgages with less than a 20% deposit.

The number of low equity mortgages approved to first home buyers hit a record monthly high of 1336 in July this year. That number was almost matched in October when 1332 were approved, which was 45% of the mortgages approved to first home buyers during the month.

That means low equity mortgage approvals to first home buyers have more than doubled since the beginning of last year.

That's a particular concern because the low equity borrowers are generally borrowing more than the borrowers with a deposit of 20% or more.

The average low equity mortgage approved to first home buyers in October was $646,000, compared to $534,000 for those with at least a 20% deposit.

In total $1.74 billion of mortgage debt was approved to first home buyers in October this year, up 11.5% compared to October last year, and up 27.2% compared to October 2023.

That growing mountain of mortgage debt may start to put some current first home buyers under pressure a year or two down the track if/when mortgage rates start to rise.

Low equity borrowers could be particularly at risk in such a situation because they will likely have less wriggle room to reorganise their finances if their mortgage payments increase to uncomfortable levels or if they suffer a reduction in income.

Readers may also be interested in interest.co.nz's Home Loan Affordability Report, which has the main measures of affordability for first home buyers in most urban centres throughout the country.