Buying your first home: Everything you need to know
- Save up a deposit before shopping for homes and loans: ideally 20% of your intended purchase price.
- Consider your lifestyle and repayment method when finding a loan that’s best for you
- There are several government-run programs that assist first-time buyers in paying for their new home.
Are you on the market for your first home? The whole process can seem a bit daunting at first. Ahead, we’ll take a look at some of the major things you should know before jumping into the borrowing process.
Saving a Deposit
Saving for a deposit is the first place to start on the home-buying process. Chances are, if you’re reading this guide you’ve already started saving, which is fantastic!
Ideally, you’ll want to save 20% of the property value before applying for loans. That means if you’re looking to buy a $400,000 home you should have at least $80,000 ready to put down as a deposit.
Although 20% is the number you should aim for, it’s not practical in all situations. You might only be able to save 10% or 15% of the price of the home but still want to enter the property market.
Lender’s Mortgage Insurance (LMI)
Each lender is different, and some may not require a full 20% as a deposit. Some lenders will take 15% or even 10% as a deposit without charging Lender’s Mortgage Insurance.
Lender’s Mortgage Insurance is one of the ways that banks protect themselves from riskier loans. It’s a one-off payment towards an insurance policy that protects the lender from the possibility of you defaulting on the loan.
As we’ve said, though, the deposit percentage differs from lender to lender. As long as you have stable employment, ample savings, and no debt, you might be able to find a loan that doesn’t charge LMI for a 15% deposit.
Other Deposit Options
Some of the other common deposit options you have include gifted deposits and guarantors. We’ll start with the latter because it’s much more assuring to the lender.
A guarantor is someone who backs your loan application with their own finances. In other words, they promise to pay the loan if you fail to.
This is usually a family member with good credit and a property of their own. The lender will review the guarantor’s finances the same way they’ll look at yours.
Having a guarantor often allows you to borrow more money without paying LMI. Make sure you don’t default, because that will be a mark against your guarantor’s credit.
Gifted deposits are also allowed, but they need to come from direct family members like parents, siblings, or grandparents.
Although these gifts may help you meet your 20% deposit goal, they aren’t a magic bullet. Lenders usually still want to see evidence of genuine savings before they’ll feel comfortable lending to you.
Finding the Right Loan
Once you have your deposit saved, it’s time to start looking for a lender to finance the rest of your purchase. You have several options and will need to make several choices along the way. Here are a few things to think about before getting started.
Fixed or Variable Rate
The first – and most common – consideration you’ll need to make is whether or not you want a fixed or variable rate loan.
Rates on fixed rate loans stay the same for a period of about one to five years – depending on the lender and the option you select. They usually come at a higher rate than a standard variable loan, but you have the security of knowing your repayments every month.
Variable rate loans change with the market. When market rates are low, variable rate loans can be more appealing. Just keep in mind that your variable rate can get higher or lower over the course of your loan.
It helps to research current market trends before you buy. If experts predict an interest rate hike, a fixed rate loan might be a better bet. If they think they’ll stay the same or lower, a variable rate loan could be cheaper.
You can also have a “best of both worlds” strategy by splitting your loan.
Variable rate loans often come with more features like early repayments, offset accounts, and redraw facilities. You can access these features and get the security of fixed repayments for a portion of your loan when you split it.
There are a few features to look at and determine whether or not they’re important to you. Additional repayments and redraw facilities have become the norm, with most variable rate loans. Some fixed rate loans even offer them now.
An offset account is something else to consider. This is a transactional account attached to your loan that can help reduce your interest. Your interest is calculated on your principal, minus the amount kept in your offset account.
Let’s say your principal is $350,000, but you’ve got $50,000 in an offset account. That means that you’ll only be charged interest on $300,000 – the amount of the principal minus the offset.
Not everyone has enough savings to get the most out of this feature, though. Some borrowers are choosing “no frills” loans instead. These are simple and transparent loans that offer a lower rate without any of the additional features.
You could also save on your home loan by including it in a loan package.
Many big-name lenders offer these packages, which usually include products like insurance, credit cards, and transaction accounts.
You can save on fees by bundling your home loan with a package but will need to consider whether or not all of these additional products are valuable to you.
Small Lenders vs. Big Banks
Small lenders like building societies and credit unions are becoming more viable when shopping for a mortgage. These lenders provide low interest rates and a personal touch, both of which attract new customers.
These lenders often don’t have the same number of loan products as a big bank, nor do they have the security behind them. Still, a lower interest rate and good customer service can be a massive selling point for new borrowers.
Programs For New Homeowners
Buying a home is a major financial commitment and one that marks a huge step in a person’s life.
It can seem daunting when you have all of the costs in front of you. Thankfully, some government programs are in place to assist first-time buyers when they make their way into the property market.
First Home Owner Grant
One of the biggest financial aids you’ll find when buying your first home is the First Home Owner Grant (FHOG). Each state and territory has one and allows you to receive a sizeable grant when you first enter the property market.
Different rules and eligibility requirements apply; for example, grants may only be available with the purchase of a new home.
This grant helps stimulate home ownership all across Australia. The amount you’ll be able to obtain will depend on where you live. The government doesn’t require you to use this grant for anything specific, either. Many homeowners put it towards their deposit, repayments, improvements to the property, or costs associated with moving.
As we’ve stated, each state and territory offers a different amount of money to first-time buyers. Most states will also have a maximum property value for their grant, usually $750,000. Take a look at the breakdown of the FHOGs below.
Stamp Duty Concession
The FHOG isn’t the only way that governments allow new homeowners to save some extra money. They also allow many buyers to have a break on stamp duty for their first home.
Stamp duty is the tax you pay on the property you buy. It will depend on the value of your home, but you may be able to get a break if it’s your first time buying.
Each state has different rules and restrictions regarding their stamp duty concession, and these do change over time. With the exception of South Australia, all states and territories offer some form of stamp duty concession for those who are buying their first home.
Here’s a rough breakdown of the stamp duty concessions and rules in each state and territory in Australia.