Finance Minister Bill English says the ASB bank unfairly raised the expectations of would-be home buyers, by pre-approving some loans and then pulling them.
Customers with deposits of less than 20% now have just over a week to use their pre-approved loan, before they are withdrawn.
ASB says the move was prompted by stricter rules which begin next month, which mean banks will be allowed to have only 10% of new lending tied up with low deposit home loans.
Mr English says the Reserve Bank has been talking about bringing in these restrictions for the last six months and ASB does not appear to have been listening.
He says first home buyers will eventually benefit from the flow-on effects of the new rules, for example lower interest rates.
Earlier comment
The Banker's Association says if first time home buyers do not have enough savings for a 20% deposit, they could end up with high interest loans they will struggle to pay back.
From 1 October, Reserve Bank rules mean that no more than 10% of a banks' mortgage lending can be to customers with low deposits.
ASB says this is why it has withdrawn loan pre-approvals from those with a deposit of less than 20% from 4 October.
Bankers Association chief executive Kirk Hope says needing 20% may push buyers to borrow from expensive, non-bank lenders.
He says that could mean these borrowers pay much higher interest rates and struggle to make repayments.
The Labour Party says the Government is to blame for letting the housing market get in such a mess.
Leader David Cunliffe says the new restrictions hurt first-home buyers and came about because of a communication breakdown between the Government and the Reserve Bank.
He asked why the Prime Minister blamed the Reserve Bank, the retail banks, the Opposition, the general public, everybody else other than his own Government for his five years of failure on housing.
Mr Cunliffe says Labour would exempt first home buyers from the new rules, on an interim basis.
ACT says ASB's decision to cancel pre-approved home loans for buyers with low deposits may actually be doing first-home buyers a favour.
ACT leader John Bank says it may become harder for people to buy their first home but that is not necessarily a bad thing.
