Buying your first home is never easy. In fact, it’s probably one of the hardest things you’ll ever do, with years of savings often required for a deposit. But the initial deposit is just the beginning. Your ongoing repayments will be your biggest cost over the next couple of decades.
What is a first home buyer loan?
While some lenders offer home loans specifically marketed towards first home buyers, there isn’t really such thing as a ‘first home buyer loan’ – first home buyers simply take out regular owner-occupier home loans. But there are some specific things a first home buyer might want to seek out when searching for a good value home loan, such as:
- A relatively low interest rate
- Low, reduced or waived fees
- Flexible features – e.g. offset account or redraw facility
- Guarantor options
Read our tips on each of these below.
By far the biggest cost factor of a home loan is the interest rate. You only have to spend a few minutes on one of our calculators to see that having a home loan with an interest rate that’s a single percentage point higher than another home loan’s (e.g. 5% instead of 4%) can cost you tens of thousands of dollars extra in interest over the life of the loan.
Of course, not everyone can qualify for the lowest interest rate on the market. Your interest rate is often determined by a range of factors, including your LVR (loan-to-value ratio), credit rating, income, expenses, suburb etc.
So to give yourself the best chance of qualifying for a low interest rate, you should aim to have at least a 20% deposit (putting your LVR at 80%), have a good track record of paying bills on time and managing your spending, and avoid buying in suburbs that are at risk of price falls (e.g. buying an apartment in an area where lots of other apartment buildings are under construction).
While its the biggest expense, the interest rate isn’t the only thing that’ll cost you. Most home loans include upfront and ongoing fees, as well as incidental fees, such as the extra costs of lender’s mortgage insurance (LMI) or refinancing. A helpful guide to the relative cost of a home loan is its comparison rate, which takes the upfront and ongoing fees into account on top of the interest rate. So if a home loan’s comparison rate is significantly higher than its advertised interest rate, you might expect high fees.
Flexible features such as an offset account or redraw facility can help first home buyers save thousands in interest over the life of the loan and pay it off loan years earlier. Such features may come with added fees or a higher interest rate on the loan, but given the savings they can help you generate, they can be worth the extra cost.
If you’re really struggling to cough up the dough for a deposit, then you can always speak to someone (usually your parents) about whether they’d consider going guarantor for your home loan.
A guarantor acts as a guardian angel for both you and your lender. They sign an agreement stating that they will make any repayments that you yourself fail to meet, protecting both parties from a default. Having this safety net can help you secure a home loan with a small deposit, exempt you from having to pay LMI or even qualify you for a low interest rate.
Obviously going guarantor isn’t something to be taken likely as it’s a huge responsibility, but if you have someone that’s willing, you should seek out a home loan that will accept them as a guarantor. While most lenders allow guarantors, they often have restrictions around who can act as one. For instance, most do not allow non-family members to go guarantor, but some do.
Save on your first home loan with the First Home Owner Grant
Each state and territory in Australia has a First Home Owner Grant (FHOG) for first home buyers. These grants have varying restrictions but in most cases, they’re applicable to those building or purchasing new property. We’ve written about what the grant offers in each state in greater detail, so it’s worth looking at how much you can qualify for. If you haven’t owned a home in Australia before, you could be granted upwards of $20,000 in some states – likely to be the biggest grant you’ll ever get from a state government!