What to compare for first time home loans
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 for first timers
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 firsthome.gov.au.
- 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.
