KiwiBuild has been accused of normalising high debt and giving first-home buyers an unrealistic and false sense of security by focusing on low interest rates in marketing material for its housing scheme.
But a spokesman for Housing Minister Phil Twyford said the $500,000 home-loan figure it used and the example of how much people could save with lower interest rates was designed to be illustrative only.
An email sent on Tuesday to the 50,000 people who have registered an interest in KiwiBuild said interest rates were falling, making a KiwiBuild home "even more affordable".
"Interest rates are at their lowest level in decades - the Reserve Bank ... revealed interest rates on a five-year fixed mortgage are 0.9 per cent lower (on average) than a year ago.
"That means repayments would be $120 less per fortnight on a $500,000 mortgage, or $3100 less over a year."
Reserve Bank figures show the average five-year fixed-term mortgage rate fell to 5.04 per cent in May, down from 5.9 per cent in May 2018.
But even on the lower rate that would leave a person paying $35,204 a year or $1354 a fortnight on a 25-year term based on calculations on the sorted.org.nz website - run by the Government's money advice arm.
Ayesha Scott, a finance professor at AUT University, said she was concerned the advertising normalised borrowing a large amount of money.
"While I suspect they chose $500k as a round figure, it is actually above average for first-home buyers. First-home buyers are borrowing less, at about $400k."
Scott said anyone considering entering the property market should make sure they could afford their mortgage with interest-rate rises.
"Remember that your loan is over 20-plus years, not five. Yes, rates are currently low, but could you still make ends meet (plus some) if they increase over the next decade?."
Claire Matthews, head of academic programmes at Massey University, said while she personally would be uncomfortable with a $500,000 home loan, it was probably not unreasonable in today's housing market given average house prices.
"From that perspective it is not unreasonable for the Government to be encouraging this, although it would be better to see the Government providing assistance to enable people to buy a home without such a large loan," Matthews said.
However, she said the focus on low interest rates in the promotional material was a concern.
"If people can only afford the loan because interest rates are so low, it's not a good idea for them to be borrowing."
While rates were at a historically low level they would not stay at that level and will rise eventually, Matthews said.
"The potential effect of rising interest rates is particularly concerning when people are borrowing at the maximum of their capacity to service the loan so that any economic hiccup could have a serious adverse effect."
Pushpa Wood, director the Fin-Ed Centre at Massey University, said she was concerned that a government agency appeared to be encouraging people to take on a big debt.
Wood said the focus on the low five-year interest rate was not realistic for the target market of first-home buyers.
"[The] majority if not all of them will be planning to pay off the mortgage in a 10/15/20 year period. Thus the low interest rate for the first five years might just get them into a habit of relying on lower repayments without considering the 'real cost of the life of their mortgage'.
"It encourages an unrealistic and to some extent a false sense of security."
Wood said the marketing put the government agency in the same camp as commercial lenders.
"This enticement of borrowing on a low interest rate for now without consideration for long-term plan and possible risks of servicing such high debt is no different to other commercial lenders. A government agency needs to have a point of difference."
A spokesman for Twyford said the Government was not encouraging people to borrow $500,000.
"It would be misleading the public to say or imply that the Government was doing that.
"The KiwiBuild unit was just giving an illustrative example highlighting the lower interest rates."
He referred the Herald to KiwiBuild's communications manager for queries on the advertising because it was an operational matter.
KiwiBuild spokesman Clint Smith said it had used the example of the $500,000 mortgage for information purposes only.
"KiwiBuild used an illustrative example of how falling mortgage interest rates are making buying a KiwiBuild home more affordable in comparison to renting. As you have noted in past articles, renters tend to have less financial security and are more likely to struggle to make ends meet.
"KiwiBuild is helping people get into homeownership at cost that is more affordable than the open market."
Asked why it had used a $500,000 mortgage as an example he said Aucklanders now paid $856,000 on average for their first home, over $200,000 more than the KiwiBuild price cap, meaning large mortgages had become an unfortunate fact of life for many Aucklanders.
"Thanks to KiwiBuild's price caps and the likes of HomeStart grant, KiwiBuild buyers are likely to be able to start with smaller mortgages than many other Auckland first-home buyers, and lower interest rates are making them even more affordable."
However the spokesman said many KiwiBuild home buyers would need mortgages far less than $500,000, with some houses starting from $360,000 in Canterbury and $380,000 in Auckland.