Controversial plans to put the brakes on mortgage lending threaten to push home buyers into the arms of loan sharks to top up deposits.

Experts say it could open up a market for cut-throat finance companies making a killing off desperate home buyers.

The Reserve Bank is planning to limit the amount of loans that banks can give to borrowers with deposits of less than 20 per cent, in an attempt to take some steam out of the overheating property market.

Banks have been told to prepare for the restrictions in loan-to-value (LVR) lending, and Beehive sources indicated an announcement was likely next month.

The Reserve Bank is yet to do its final round of consultation with ministers on the move, and has said it will give two weeks' notice of the new regime starting.

It is understood government attempts to protect first-time buyers from the changes have been unsuccessful, and it is likely they will be most affected, raising fears they will turn to second-tier lenders to make up the difference.

The change means that should someone be looking to buy a house for $500,000, a 20 per cent deposit would be $100,000 - a huge jump from a 5 per cent deposit of $25,000.

Financial Services Federation (FSF) executive director Lyn McMorran warned of a return to the days when cowboy finance companies and solicitor's loans were commonplace.

"In the bad old days, you'd pay horrendous interest rates on second mortgages," she said. "That'll happen again."

While at least one of the FSF's members offers mortgage top-ups, McMorran said few had made it through the collapse of the finance company industry.

"What's likely to happen if people start sniffing that there's a market for it, is that the dodgy players will come back into the market again," she said.

McMorran said the few remaining operators and banks were experienced and reputable, and the Reserve Bank's "fiddling" could prove counterproductive.

"Just leave it alone - it's not broken, so don't fix it," she said.

Non-bank lending specialist Kim Lyons, owner of NonBK Limited, expected a flood of new business if the rules were introduced as expected.

"We might get a first mortgage through a mainstream lender such as a bank, but we'll be using other means to get the additional funds," he said.

Lyons deals with several small finance companies as well as private lenders - whom he would not name - with a couple of million dollars on their loan books.

He had given home loan top-ups ranging from $5000 through to $350,000, with interest rates typically running around the 14-16 per cent mark.

That's roughly two to three times more expensive than typical bank mortgage rates, which are still at or below 5 per cent for some fixed terms and around 5.75 per cent on floating rates.

Lyons, a registered financial adviser, said he encouraged first-home buyers to repay high-interest debt first, with the primary mortgage usually set up as interest-only.

He also said he was always upfront about the higher costs of non-bank finance.

"There's a lot of people who don't tell it all - we're definitely not in that space."

The Reserve Bank is all too aware that people will find creative ways to get enough equity to avoid its strictures.

Publicly released discussion documents reveal that it is hoping the higher cost of non-bank loans will turn people away from "opportunistic lending".

In any case, the bank said, borrowing from unofficial sources "would present less risk to the resilience of the financial system, given that these lenders sit outside the ‘core' system".

In a recent speech, Reserve Bank deputy governor Grant Spencer said the most obvious alternative was for people to hit up mum and dad or other relatives to top up the deposit.

"That is a family's prerogative, and there is nothing the Reserve Bank could or should do about it," he said.

Bankers' Association chief executive Kirk Hope said it was likely that people would turn to other sources, based on other countries' experiences.

"In Canada and Sweden that's exactly what happened," he said.

Loan-to-value restrictions applied in Sweden in 2010 have made it commonplace for Swedes to borrow a portion of house purchase costs through an unsecured top-up.

In South Korea, the practice became so prevalent that authorities had to extend the regulation to cover non-bank lenders as well.

That is something our central bank has said it would consider in "due course" if avoidance became a big enough problem.

PURCHASERS IN DICE WITH PERCENTAGE CLOCK

The new 20 per cent rule has created a race against the clock for Alastair Aitchison and partner Nicole Bladen.

The couple, both in their early 20s, have saved $20,000 - 5 per cent of the $400,000 they have been pre-approved by the bank to borrow.

The problem is finding a house in Auckland for $400,000.

Aitchison said he had been to over 20 open homes in three months.

The only houses in the late $380,000 range they had found had "issues" such as water-tightness or unconsented alterations that made the bank unwilling to lend them money on.

If they could not find a house before the limit went up, their $20,000 deposit would have to become $80,000.

Aitchison said this meant saving for about eight years.

He rejected the idea of borrowing from a finance company for the increased deposit as it did not make economic sense.

Renee and Matt Wilkinson, both 22, bought their first house - a 1920s bungalow in Otahuhu - in February for $338,000 with an 8 per cent deposit.

Renee said under the 20 per cent rule they would have had to borrow money from their parents and would have probably bought their first house in their 30s rather than their 20s.

She said she would not borrow from a finance company for a deposit but the thought had crossed her mind when they were looking.

She could imagine her peers might do so.