First time buyer home loans

Buying your first home is an exciting prospect that can also be a little daunting, but Finty has you covered. Find out everything you need to know about first time buyer loans and compare your options right here.

By   |   Verified by David Boyd   |   Updated 8th January 2021

Comparing first time buyer home loans for $450,000.00 over 30 years


Loans for first home buyers are designed to suit people stepping onto the property ladder for the first time. But there's no one-size-fits-all first home buyer loan, so you'll need to understand the following aspects of the loan products offered:

  • Interest rate. This is expressed as an annual percentage (e.g. 2.59% p.a.) even though interest is calculated on your daily loan balance and charged monthly. The interest rate may be fixed at first, and then switch to a variable rate after the first few years, or the rate may be variable from the outset, Choosing a fixed rate to begin with means that you have some certainty about the amount of your monthly repayments. Opting for a variable rate means that your payments could go up or down, usually – but not always – in line with the Reserve Bank's official cash rate. It's also possible to split your loan into two portions, one with a variable rate and one with a fixed rate.
  • Fees. Home loans have various fees attached to them. Depending on the lender, loan type and amount, your fees could include an application or loan establishment fee, a Lenders Mortgage Insurance (LMI) premium, a switching fee if you want to change your loan's features at any stage, a break fee if you make an unscheduled change from a fixed to a variable interest rate, and a loan discharge fee if you terminate your loan early. You'll also need to pay government stamp duty when the mortgage is registered.
  • Comparison rate. This is an interest rate shown alongside the advertised interest rate. It is a notional rate which includes the cost of any unavoidable fees attached to the loan, and as a result is slightly higher than the advertised rate. Comparison rates make it easier to compare loans with different fee structures.
  • Loan term. Typical loan terms are 25 years or 30 years. Choose a longer term to keep your monthly payments low. Choose a shorter term to reduce the total amount of interest you'll pay during the life of the loan.
  • Offset account. Some loans offer a bank transaction account linked to your home loan account. If you regularly deposit your wages and any spare cash into your offset account, your monthly interest charge will be lower because interest is calculated on the remaining amount of your loan principal minus the credit balance in your offset account.
  • Extra payment and redraw facility. You may make additional repayments against your home loan so that you can pay it off faster, if your lender and loan type allows this. But the day may come when you need access to extra cash, perhaps for an emergency, and a loan with a redraw facility will allow you to withdraw some of the extra payments you have made.

Deposit amount and borrowing limit

Most lenders expect you to save for a 20% deposit before you can qualify for a home loan. But there are ways of getting around this if your deposit amount is smaller``:

  • Lenders Mortgage Insurance (LMI). If your Loan to Valuation Ratio (LVR) for the property you want to buy is greater than 80% (i.e. you have a deposit of less than 20%) the lender is likely to insist that you pay for LMI to protect them in the event that you are unable to repay your loan. You may be able to add the cost of the insurance premium to your loan amount. It could cost around $10,000 in LMI premiums for a $500,000 home loan with only a $50,000 deposit.
  • Home loan guarantor. One way of avoiding both the 20% deposit requirement and LMI is to have someone else guarantee a part of your loan. A parent who has substantial equity in their own home could agree to guarantee a portion of your loan, with the lender taking a charge on their property as security for the amount guaranteed. If you default on your loan, the lender will pursue first you, and then the guarantor, to recover its costs, putting both your own property and your parent's home at risk of repossession. Guaranteeing a home loan is therefore something not to be undertaken lightly, and most lenders insist that guarantors get legal advice before proceeding.

Government assistance for first home buyers

When buying your first home, you may be able to get financial assistance from the federal government and your state government, to remove the need for LMI or a guarantor, or reduce the amount you need to borrow. Here's a summary of the programs available:

  • First Home Loan Deposit Scheme (FHLDS). The federal government will guarantee up to 15% of the value of a property for first home buyer loans, removing the need for either LMI or a family guarantor, and making loans available to borrowers with as little as 5% deposit. An additional 10,000 guarantees specifically for newly-built homes were made available in the 2020-21 federal budget. See National Housing Finance and Investment Corporation for details.
  • First Home Owner Grant (FHOG). Many Australian states and territories have a grant scheme for reducing a first home buyer's loan. Grants range from $10,000 to $25,000, depending on which state you live in and whether you are buying an existing property or one that's newly-built. Find out what you can apply for at
  • First Home Super Saver Scheme (FHSSS). Voluntary contributions of up to $30,000 that you make to your superannuation fund can be withdrawn to form a part of your deposit if you're a first home loan buyer. This can help you save for a deposit faster because of the concessional tax treatment of superannuation contributions. You can find the details on the ATO's First Home Super Saver Scheme page.
  • Stamp duty and LMI duty concessions. Duty is payable on both property transfers and LMI premiums, but some states have concessions for first home loans. Find out what's on offer at your state or territory Revenue Office or Treasury Department.

Your credit score is important

When you apply for a home loan, there's more to getting approved than just having a big enough deposit and an income large enough to cover loan repayments. Your credit score will also play a big part, not only in whether or not your application is approved, but also in the interest rate you are offered. To qualify for a home loan and score a low interest rate you're going to need a decent credit score. We have some tips on how to improve your credit score.

You can also check your credit score for free here.

Learn about first time buyer home loans

Our team share how first time buyers can get a home loan.

  • Pros & cons

  • Tips

  • FAQs

Building equity in your home is a slow process

When you first start to pay off your home loan, each repayment instalment is made up mostly of interest charges, with just a little amount going towards reducing the loan principal. But as the years go by, the loan principal reduction takes up a larger and larger share of your repayments. First home loan buyers do not tap into a get-rich-quick scheme, but have to be patient and content with a slow build of equity.

It only works if you're financially disciplined

There's no point in getting into a big long-term commitment like a home loan if you can't trust yourself to stick to a budget and make your repayments on time and in full every month. Your repayments will be automated, but you still need to make sure that there is enough cash in your account to meet them. Anyone can run into financial difficulties that aren't their own fault, like unemployment, or an accident or illness, but you could end up worse off by committing to a home loan while still giving into self-inflicted problems like impulse buying and running up credit card debt you can't afford to repay immediately.

Say goodbye to rent

The rent money you pay goes into your landlord's pocket and stays there. The home loan repayments you make go to your lender, but some of it comes back to you in the form of equity in your home, slowly at first, but in an amount that increases with every repayment, until you finally own a home 100%.

The risk is low, but still there

If there were no risks at all in buying a home, lenders would not need Lenders Mortgage Insurance. But, although Australian house prices have risen steadily over the long term, there have been short-term hiccups such as the Global Financial Crisis of 2007-2009, and the financial uncertainty caused by coronavirus, beginning in 2020. So, although there may be little risk in staying in the housing market over the long term, provided you keep up with repayments and avoid repossession, it could be a problem in the short term if you have a very low deposit and end up with negative equity as a result of a temporary fall in prices.

You can improve your home and add to its value

If you've been living in a rental property there have no doubt been times when you would have liked to carry out some improvements, such as painting the walls or planting out the garden, but you were held back by the idea of spending your own money to lift the value of property owned by someone else. But once you're in a home you're buying, everything is different. Every dollar and every hour of work you put into renovations and improvements will add to its value, not only for your comfort but for your financial benefit as well.

Your credit score will improve

Home loans for first home buyers are a way to improve credit scores. When your lender asks for a copy of your credit history from a reporting agency, your score will drop slightly, but it will begin to rise again solidly once you begin to make timely home loan payments. A home loan is regarded as responsible borrowing and will improve your credit score by adding a large instalment debt to your credit mix, which may previously have consisted mainly of revolving debt (e.g. credit cards) and possibly a personal loan.

An offset account will save you heaps

Although the interest rate you are offered may seem like the main consideration for keeping your interest costs low, don't overlook the power of an offset account. Every dollar you have in an offset account, for every day that it's there, will reduce your home loan interest cost, because the balance of your offset account is deducted from the balance of your loan account for the purposes of calculating monthly interest charges. You can use an offset account just like any other bank transaction account, having your wages paid into it automatically and then paying bills from it or withdrawing cash. An offset account will save you a lot more in interest than you could possibly earn by keeping your spare cash in a savings account, and you avoid paying tax on interest income.

Check your credit score before you apply

One of the first things a lender will do when you apply for a home loan is to request your credit history and score from a credit reporting agency. It's a good idea to get ahead of the game and take a look at your credit score yourself first, so you know what they'll be seeing.

Compare loans from different lenders before making your decision

You don't need to settle for a home loan product being offered by the bank where you have your bank accounts or credit card. There are many lenders competing for your business, and you're more likely to be offered a better deal if you can demonstrate an awareness of your multiple options. Every loan product is slightly different, so be sure to compare all features, including:

  • Advertised interest rate
  • Comparison interest rate
  • Interest rate type – fixed, variable, split, introductory offer
  • Any fees not included in the comparison rate
  • Choice of loan terms
  • Ability to make additional payments
  • Availability of offset account or redraw facility

You should only deal with lenders who have an Australian Financial Services (AFS) licence and mortgage brokers who have an Australian Credit Licence.

Explore all forms of assistance that will see you buying sooner

In a rising property market it can seem that your chances of home ownership are receding faster than you can save for a deposit. So, make sure you exploit to the full every option that will either add to your deposit amount or allow you to purchase with a smaller deposit. Here's a checklist of available assistance:

  • Lenders Mortgage Insurance will add to your costs but could allow you to buy with a deposit of less than 20%.
  • A loan guarantor, such as a parent, may be able to guarantee a part of your loan if you have a deposit of less than 20%.
  • The First Home Loan Deposit Scheme from the federal government could guarantee part of your loan so that you only need as little as 5% deposit.
  • A First Home Owner Grant from a state or territory government could add a substantial amount to your deposit.

Extra repayments will shorten your loan term and save lots of interest

If your loan doesn't come with an offset account facility, you may still be able to reduce your interest costs by making extra repayments if your loan terms allow this. Any extra cash you receive, tax refunds, interest from a savings account, a work bonus, an inheritance or even a small lotto win, could be paid into your home loan account, reducing the loan principal on which interest is calculated. Because of the compounding effect of interest, regular extra payments of a few hundred dollars could save you many thousands in interest charges and see you pay your loan off sooner.

Start saving as soon as possible

Even if you think that it may be years before you're ready to buy your first home, it's never too early to start saving. If you set up a personal budget that will see you adding to your savings each month, even if the amounts are small at first, you will find it easier to get into the savings habit. The goal of a 20% deposit won't seem so unreachable if you've already made a good start, and a history of savings will stand you in good stead in the eyes of a lender when it comes to being approved for a loan.

How much will I need as a deposit as a first-time buyer?

The amount you will need as a deposit is not determined by the fact that you are a first time buyer. Instead, it depends on your income and creditworthiness (as reflected in your credit history and credit score) and the value of the property you are aiming to buy. The lender will usually request a valuation report on the property, and then work out a Loan to Valuation Ratio (LVR).

For example, if the valuation report says that the property is worth $750,000, and the lender decides, after reviewing your income and credit score, to offer an LVR of 80%, your maximum loan amount would be $600,000. If you were paying $750,000 for the property, you would need a deposit of $150,000 (20% of the value). But if you were paying, say, $765,000 for a property valued by the lender at $750,000, your required deposit amount would be $165,000.

Is a first time home buyer loan worth it?

Yes, as long as you can afford the repayments – and you probably won't be approved for a loan if you can't – and stick to the repayment schedule. Buying your first property may be just the beginning of your movement up the property ladder, and investment in real estate has proved to be more profitable and less risky than many other forms of investment in Australia over the long term. Although there are no guarantees that this trend will continue, and it is also entirely possible to make a loss by selling property after owning it for only a short while, most people look on home ownership as more a lifestyle decision than an investment. But it has many financial benefits, including putting an end to dead rent money and making it more likely that you will be able to live comfortably once you retire.

What are the upfront costs I should budget for when buying my first home?

Buying your first home can be quite daunting, and it’s easy to overlook some of the costs you will need to cover in addition to your loan. They can include:

  • Building and pest inspection. It’s a good idea to have a property checked by a licensed builder and a pest control specialist before you commit to buy. You need to know that the building is structurally sound and free of termite infestation. The combined cost is likely to be between $400 and $800.
  • Conveyancing fees. This is the cost of having your sale contract prepared by either a solicitor or a professional property conveyancer.
  • Stamp duty. This is a government tax on property title transfer that varies from state to state, payable as a percentage of the property value. First-time buyers may be able to access stamp duty exemptions or concessions in some states.
  • Moving costs. Even if you are going to DIY your removal, you’ll probably need to hire a van or small truck. Professional removalists cost much more.
  • Insurance for home and contents. You may already have home contents insurance if you’re renting, but you’ll need to contact your insurer to advise your new address, and perhaps increase the insured value of your contents if you’re buying new furniture and appliances. And you’ll certainly need new separate cover for your home’s structure, in case of storms, fires and other risks.
  • Utility connection fees. Some telcos, electricity and gas companies and household water providers charge an upfront fee (refundable or transferrable if you move) before they will connect services to your new home.
  • Renovation costs. Many first home buyers can only afford a property that is something less than a dream home. It may need quite a bit of ‘fixing up’ before it becomes a pleasure to live in. But don’t worry. This is just your first step on the property ladder, and your dream home is likely to become more affordable as your home equity increases as a result of your loan repayments.

What if I can’t come up with the deposit amount dictated by the LVR?

If your lender needs a 20% deposit (as calculated by the LVR) and you can’t come up with the required amount, you still have a few options:

  • Lenders Mortgage Insurance (LMI). This is an insurance policy which protects the lender from financial losses arising from a borrower’s failure to meet home loan repayments. If the lender repossesses the property because of repayment default, then sells it, and the sale price achieved is less than the outstanding loan amount, the lender can recover the remaining balance via the insurance policy. The borrower must pay the LMI premium, but the cost can often be added to the loan amount and repaid over time.
  • Loan guarantor. Another option is to have your mortgage repayments guaranteed by another person. This will usually be a close family member, such as one or both of your parents. They will need to own a property themselves (or have a large amount of equity in it) because the lender will require a charge over their property as additional security for your loan. It is not something to be undertaken lightly by the guarantor, because if you default on your repayments the lender will seek to recover any losses from the guarantor. In extreme cases this could mean that the lender enforces a sale of the guarantor’s property in order to recover its losses.
  • First Home Loan Deposit Scheme (FHLDS). The federal government will guarantee up to 10,000 low deposit home loans per year, meaning that borrowers can avoid either paying LMI or asking a family member to act as guarantor. An additional 10,000 loan guarantees specifically for newly-built homes were made available for the financial year ending 30th June 2021. See details at the National Housing Finance and Investment Corporation.
  • First Home Owner Grant. Some Australian state and territory governments offer first-home-buyer grants, varying state-by-state at the time of writing from $10,000 to $25,000. The grant may be added to your existing savings in order to fulfil the lender’s deposit requirements. There are different eligibility rules in each state, and in some states you will need to be buying a brand new property rather than an established one. Some states have other concessions available to first-time buyers. These may include stamp duty concessions and LMI insurance duty concessions. Check with your local state government for the details that apply to your situation.

What is a comparison interest rate?

Lenders are obliged by law to quote two interest rates for each loan they offer. The first rate quoted is the face value rate, the percentage interest rate that will be applied continuously to your remaining loan principal. The second rate, the comparison rate, has factored in the cost of the lender’s fees (such as an application fee, property valuation fee, loan establishment fee, monthly or annual account keeping fee, loan discharge fee) over the life of the loan, and expressed this as an equivalent monthly interest rate so that you can compare loans on a level playing field.

For example, both Lender A and Lender B may be offering an interest rate of 2.90%. But Lender A’s comparison rate is 2.91%, lower than Lender B’s comparison rate of 2.93%, because Lender B’s loan fees are much higher. A small difference in the interest rate percentage can add up to thousands of dollars of extra interest cost over the life of a loan.

What is a first time buyer home loan?

It’s a home loan with features suited to someone dipping their toe in the property market for the first time. But, because there are many different types of first home buyers, the features that suit one first-time buyer may not suit another. So you need to decide what combination of the following features will work best for you:

  • Lowest price. The lowest price combination of interest rates and fees (Tip – Look for the lowest comparison interest rate.)
  • Fixed, variable or split interest rate. The interest rate applied to your loan could be fixed for a period of up to five years and then revert to a variable rate, or a portion of your loan could be at a fixed rate with the remainder subject to a variable rate, or it could have a variable rate on the entire loan principal right from the start.
  • Flexible loan terms. A choice of loan terms so that you can choose a longer term (e.g. 30 years) if you need smaller monthly repayments to suit your budget, or a shorter term (e.g. 25 years) if you can afford larger monthly repayments, meaning that you’ll pay much less in interest charges over the life of the loan.
  • Other features. You may be interested in facilities such as an offset bank account (to minimise interest charges), an extra repayment facility (to pay your loan off earlier), or a loan redraw option (in case you get ahead with your repayments but then find you need access to some of the cash you have already handed over).

What types of interest rate are available for first time buyer home loans?

There are five interest rate options:

  • Variable interest rate. The interest rate may go up or down during the life of your loan, usually more or less in line with changes in the official cash rate set by the Reserve Bank of Australia. Your required monthly repayment amount will vary as the interest rate changes, but you can make repayments higher than the required amount if you wish.
  • Fixed interest rate. The interest rate on your loan is fixed and will not vary during a set period, which may be between one and five years. Choose a fixed rate only if you are fairly sure that interest rates generally will not go down during the period that your rate is fixed. During the fixed period, your monthly repayment amount is also fixed, making it easier to budget.
  • Split interest rate. In this case, a part of the loan is subject to a fixed rate, while the remainder is subject to a variable rate.
  • 'Honeymoon’ interest rate. This is an introductory rate, a lower rate which may be offered by some lenders during the first one or two years of the loan term. It allows you to ease your way into your loan with lower repayments at first, particularly useful during those early years when you may have additional expenses like stamp duty, buying new furniture or renovation expenses. But before you commit to a loan, be sure to check what the revert interest rate (the rate that kicks in when the honeymoon period is over) is likely to be.
  • Interest-only loan. Most home loan repayments include the interest cost and a portion of the principal. In the early years of the loan, the amount of principal repaid is small, but in the later years, as the loan principal gradually declines, there is a shift in the ratio between principal an interest, with loan principal taking up an increasingly large share of the repayments. However, an interest-only loan requires you to repay only the interest cost and none of the loan principal. This is a particularly risky type of loan, especially if property market values are declining, leaving the borrower open to the possibility of negative equity (owing more on the property than it is actually worth). Lenders may be very reluctant to offer interest-only loans to first time buyers.