The Ultimate guide to buying your first home and selecting your first home loan


Buying your first home is a huge decision that involves a number of different steps and a number of different parties, which can make it both confusing and daunting. This guide is designed to help you navigate through this process and provide tips on how to find the best first home loan deal.  

 

Lenders Key Fact Sheets

Key facts sheets which home loan providers are required by law to provide are designed to help homebuyers compare home loans on an apples to apples basis. The law dictates what information must be included in a home loan key fact sheet, which means the information on each product is presented in a uniform format and so easier to understand and ultimately compare with other competing products.

A lenders key facts sheet will include information such as:

  • The basic features of the home loan such as interest and comparison rates, interest type, term of the loan, loan amount and repayment frequency.
  • The total amount you’ll pay back over the course of the home loan
  • The establishment fee and any ongoing fees applicable to the home loan
  • How much you will be required to repay each month and each year
  • How much extra you would be required pay if your rates increased by a 1% p.a.
  • The affect repaying an extra $200 a month towards your home loan would make to the loan term.

These home loan key fact sheets are an excellent tool for assessing the basic features on home loans though they do not cover all the details of each home loan, so they should be used in conjunction with a deeper investigation of the features on any home loan you are considering.

 

Home loan comparison rate

When advertising home loans all lenders must by law publish a comparison rate. This comparison rate is designed to help homebuyers calculate the true cost of any home loan and compare home loans on alike for like basis. Comparison rates include the underlying base rate plus associated fees and charges. For instance, if a lender’s advertised rate is 5.0% p.a., once the fees and charges are included, its comparison rate may be 6.5% p.a. Comparison rates are calculated using a formula specified by law based on a set amount, loan term and frequency of repayments. 

 

What types of home loan are available for first home-buyers?

There are 4 types of home loan that are offered to first time homebuyers, to help navigate through these options we have outlined the features of these home loan types below.

1. Principal and interest home loan

Principal and Interest Home Loans are the most popular type of home loan, representing over 70% of all new home loans granted each year. The loan principal is the amount of money that you have borrowed from your home loan provider , whilst the interest is the charge you pay for borrowing the money.

Each repayment made on a Principal and Interest home loan is split, with a portion repaying the interest charges and the remainder paying off the principal amount. Over the course of the loan term this split in the payments changes as you pay off your principal, there’ll be less interest due, so more of your repayments will go towards repaying the principal.

 

2. Interest-only home loan

Interest-only home loans offer lower repayments by only requiring the interest charge to be repaid, which can be an attractive when funds are tight in the early stages of a loan. As no repayments are being made against the principal, your loan amount is not reducing and you are not building up equity in your home. The net result is that your loan will never get smaller, though your repayments will be lower than with an equivalent principal and interest loan.

If becoming mortgage free by paying off your home loan is your objective, interest-only loans may see the process lengthened, and may see you pay more interest than with an equivalent principal and interest loan.

 

3. Low doc home loan

The application for most home loans requires that you provide a raft of information about your income and assets that the lender uses to assess your application and make a decision on what if any loan they will offer you. An application for a low doc home loan does not require as much of this information, which makes these loan popular with borrowers who are self-employed or investors who frequently do not have documents that can verify their income and assets.

Lenders classify these Low Doc Home Loans as more risky than many of the other home loan types and counter balance this by charging higher interest rates and requesting larger deposits on these loans.

 

4. Construction home loan

Building your first home has become an increasingly attractive option in recent years with the availability of vacant land and the enthusiasm of Australians to develop their own property. Construction home loans are designed specifically to support the building of new homes and extensive renovation projects, where  funds are released by the lender at different stages in the building process,  allowing you to progressively access your loan funds when you need it. A key benefit of this progressive release of funds is that you are only charged interest on the amount of money you have drawn down from your home loan, which can deliver significant savings in interest.

 

Tailoring your home loan to suit you

Once you have settled on the most appropriate home loan type its now time to assess which optional features you’d like included with your loan, many of which are designed to increase the flexibility of your home loan, which may not be important in the early years of the loan but may well become valuable in the mid to long term. These optional features are previewed herewith:

100% offset account - A 100% offset account is linked to your home loan, with any funds held in the account being used to offset a proportion of the interest costs due on the outstanding home loan amount.

Additional repayments - The majority of home loans offer the option to make extra payments towards paying off your home loan, with these extra repayments reducing the loan term and the amount of interest you pay. Some variable rate loans and most fixed rate loans will have a maximum amount of extra funds you can put towards your home loan each year, while others may not allow any amount of additional repayments to be made.

Redraw - A redraw facility enables you to get access to any additional repayments you have made on your home loan. Redraw facilities are a good feature where flexibility on accessing funds is an important factor.

Loan portability - Selling a property and then buying another usually requires the closing of one home loan and the opening of a new one. With home loan portability you get to keep your home loan and simply transfer it over to the new property, meaning you can avoid paying fees such as application fees or cancellation costs. This option typically has a number of requirements, such as keeping the home loan amount the same and carrying out the exchange and settlement of both properties on the same day and same time.

Repayment frequency - Each repayment you make will get you closer to paying off your home loan, and the frequency at which you make them is another choice you can make with most home loans. Most home loans allow for weekly, fortnightly and monthly repayments, so you can choose to pay it off in a way that synchs with how you receive your income.

Repayment holiday - Taking a break from making repayments on your home loan, through a repayment holiday, can be a useful option during times of financial stress, with breaks of 3 - 12 months generally available. When taking a repayment holiday it is important to bear in mind that the payments you miss out on are still payable later, and you are charged interest on the home loan for this period. You won’t have to pay this interest during the holiday, but rather it’ll be added to your outstanding home loan balance and will begin to be paid through your repayments when you start to make them again.

All in one account - Some home loans allow you to merge your mortgage, savings and cheque accounts together, often with a credit card also being part of the account. This all in one approach provides the opportunity to consolidate your debts and put your salary and other income into the account to reduce the interest payable. All in one accounts tend to charge a higher interest rate and have higher entry fees.

 

Interest rate options for first time buyers

Fixed vs. variable interest rate

With a fixed rate home loan the interest rate remains the same for a set period of time, which is generally 1,3 or 5 years. These fixed rate home loans are popular with first time buyers who want to know that their home loan repayments are not going to change in the early years of the loan, which provides peace of mind and makes budgeting to make the repayments a little easier.  

Conversely, with a variable rate home loan, the interest rate is subject to change at the discretion of the lender, which in turn will mean your repayments may change. Despite these potential changes in rate these Variable Rate home loans tend to work out cheaper that fixed rate loans, in the medium to long term.

An option which seeks to deliver the benefits of both a fixed and variable rate home loan is the split rate home loan, which provides the opportunity to fix a proportion of your loan, with the balance being on a variable rate.

 

The Pros for fixed rate home loans

  • Fixed rate home loans generally include the ability to make extra repayments during the fixed rate period, though the number of payments permitted maybe limited.
  • Fixed rate Home loans generally include redraw facilities, so you can access any extra repayments you have made.
  • Your repayments will not change for the duration of the fixed rate period that makes budgeting easier.
  • If interest rates change during the period of your fixed term you will not be impacted be these.

 

The cons for fixed rate home loans

  • Fixed rate home loans are less flexible than variable rate home loans as they tend to include a range of more rigid terms and conditions than variable rate home loans
  • If you prepay more than a predetermined threshold during the fixed rate period it is likely that your lender will add a fixed rate break cost to your loan that can be significant.
  • If interest rates fall during the tenure of your fixed rate period you will derive no benefit of these rate changes as your rate remains at the rate you agreed to fix it at.

 

The pros for variable rate home loans

  • Variable rate home loans generally include greater flexibility with the inclusion of features such as a choice of payment frequency and amount and the option to take a repayment holiday..
  • Variable rate home loans often include low introductory rates for an initial period of the loan, particularly where you have a sizeable deposit.
  • During periods of low interest rates variable rate home loans tend to be very competitively priced as they generally align their interest rates to the prevailing low market rates.

 

The cons of variable rate home loans

  • As variable rate loans are subject to interest rate fluctuations, your home loan repayments can change with each rate change making budgeting difficult.

 

Honeymoon or Introductory loan rates

Most lenders will offer first time homebuyers a discounted interest rate for an introductory period for the first 6-12 months, or the “honeymoon period”. At the end of this introductory period your home loan rate will revert to the lenders standard variable rate, which is generally higher than the introductory rate by between 0.25% and 0.75%.

 

Financial support for first homebuyers - getting the FHOG

The First Home Owner Grant is a government scheme that was introduced in 2000 to offset the effect of GST on buying or building a home. It’s a one-off tax-free payment for eligible first homebuyers who purchase or build a residential property to live in. The First Home Owner Grant isn’t means tested, so whatever your financial situation is, you are eligible to apply.

State and territory governments are responsible for distributing the FHOG on behalf of the Federal Government so you will need to check how it works in your state, as the grant amount, eligibility criteria and payment details of First Home Owner Grants vary between states and territories. Some state and territories have additional grants and stamp duty concessions for first homebuyers who purchase or build a home, especially in regional areas, so again it’s best to check the specifics in your area on the FHOG website

Broadly speaking, the main conditions that determine eligibility for the FHOG in most areas are set out below:

  • You must be an Australian citizen or permanent resident buying or building your first home in Australia
  • The property you buy must be a recognized house, unit or flat specifically designed for people to live in
  • You or your partner must not have purchased in Australia before
  • You must occupy the home for a period of at least 6 months within 12 months of settlement or within 12 months of building completion if it’s a newly built home
  • You must apply for the grant within 12 months of settlement or building completion. The grant will be paid at the time of settlement or building completion or where you apply after this time subsequent to your application
  • Contracts must be exchanged between the buyer and seller before any cut-off dates

 

Why the size of your home loan deposit matters

The loan terms offered

Each of the home loan lenders are in the business of calculating risk which is their key determinant of what terms and rates they will offer you on any particular home loan. The lower the risk they perceive you to be, the better the terms they will generally offer. The deposit you can afford to make on your first home is an indicator, used by lenders to access your commitment to repay the loan, with larger deposits potentially being rewarded with discounted interest rates.

Lenders Mortgage Insurance

Your lender may insist that you pay Lenders Mortgage Insurance (LMI) if their assessment of your application deems you to be at the higher end of the risk scale. This insurance insures the lender against any losses that may occur in the event that you default on your home loan.

Lenders use the Loan to Value Ratio (LVR) calculation to assess where your application sits on the risk scale. The loan to value ratio considers the amount you wish to borrow relative to the value of the property you are seeking to purchase. The higher this ratio, the more risk for the lender.

Generally, if you have an LVR of greater than 80%, which means you are seeking to borrow more than 80% of the property’s value the lender will require you to pay an LMI premium. With LMI in place, some lenders will allow you to borrow up to 95% of the purchase price of your home.

The cost of LMI varies depending on the percentage of the property value borrowed and the loan amount. The premium can also vary depending on whether your contribution is made up of genuine savings or has come from other sources, such as a gift.

LMI is calculated as a percent age of the loan amount and your LMI will vary depending on your Loan to Value Ratio (LVR) as well as the amount of money you wish to borrow. The percentage you’re required to pay increases as the LVR and loan amount increase, and usually goes up in stages.

Lenders Mortgage Insurance costs differ depending on the loan, lender and the LMI provider. The factors that determine the cost of your LMI can also include:

  • Whether your property is owner occupied or not - it is believed that you are less likely to default on a loan if the property is also your residence.
  • If you are self employed or paid as a PAYG employee.
  • Whether or not you have genuine savings.
  • Whether or not you are applying for the First Home Owner Grant (FHOG).

Stamp duty and GST are both payable on Lenders Mortgage Insurance and these are generally included in the total quoted price for your LMI.

 

Pay less interest charges over your loan term

The less money you borrow, the less you have to pay off in the future. This means over the course of the home loan, you’ll also be paying less interest.

 

What counts towards your home loan deposit?

Savings - Lenders are looking for evidence of regular saving made over a sustained period of time, with savings that have paid into an account for at least a 3 month period being the minimum they will include in their assessment. This regular saving is viewed as evidence to the lender that you are capable of making regular payments and thus capable of maintaining the repayments on a home loan.

Some lenders may offer loans of up to 97% of the property’s value, most will want to see a history of genuine savings to the value of at least 5% of your new home’s value.

Investments, shares, equity in other properties - Making regular deposits isn't the only proof of genuine savings. Lenders will also view the following as proof of genuine savings:

  • Term deposits held for at least three months
  • Shares held for at least three months
  • A gift of money held in an account for at least three months
  • Inheritance when held in an account for at least three months
  • Equity in an existing property

Gifts of money - As the affordability of houses continues to rise many first time buyers are finding it increasingly difficult to save the size of deposit required to make a property purchase in their desired area. This has lead to many first time buyers relying on gifts of funds from family members that bolster their deposits to levels that enable them to successfully apply for a mortgage and secure their first home.

In these circumstances, the lenders will require proof that this is in fact a ‘gift’ and that you are not expected to repay the money. Lenders will want to see a statutory declaration confirming that the money is being gifted from an immediate family member and is non-repayable. Different lenders require different levels of detail around the use of a gift of money, so it’s best to speak with your preferred lender to see what the specific requirements are.

In general, most lenders will require the money to be held in a savings account for at least three months for it to be considered as savings.

Proof of consistently paid rent - For some lenders, your rental repayment history can be used as proof of savings. Lenders will view your rental ledger as proof of savings under certain conditions:

  • You are still renting when you apply for the home loan
  • You have leased the same property for at least 12 months
  • You lease your property through a registered property manager or real estate agent.

Selective lenders will accept rental repayment history as savings and the majority of them will also require you to have some other proof of savings, either in the form of a gift of money, or regular savings in an account for at least three months.

 

How can a guarantor help with the purchase of a first home?

As house prices continue to rise the size of the deposit required to attain a home loan increases securing your first home can often seem out of reach. If you are finding difficult to save a deposit, which is common when you are renting, there is a solution that could help you purchase your 1st home, which is having a 'guarantor'.

A guarantor is someone - usually a parent or a family member - who offers their own home as extra security for your home loan. The guarantor isn't required to make any payments on your home loan, though will be the first point of contact if you miss your home loan repayments, as the liability for these payments shifts to the guarantor.

By having a guarantor on your home loan you are significantly reducing the lenders risk, which will generally result in the lender requesting a far smaller deposit and also waiving the need for Lenders Mortgage Insurance, which can save you significant dollars. When you make your home loan application with a guarantor the lender will carry out the same checks on your income and expenditure, to ensure you can cover the mortgage repayments, so you will still need to have your finances in order and be ready to commit to these regular repayments.

 

What are the costs to buy a house?

Pre-purchase inspections - Pre-purchase pest and building inspections are conducted to check the property for any building defects and pest issues. These inspections are not compulsory but can provide peace of mind on the property you are looking at purchasing. A basic building inspection costs in the range of $300-$500, if you add pest inspection into this the price rises to $600-$900.

If you are looking at purchasing an apartment, a strata search will provide information on any levies, insurance details, disputes, history of repairs and more.

Home loan administration costs - Your lender may charge a number of upfront home loan costs that may include:

- Home Loan application fee - budget up to  $800

- Lender's property valuation costs - a fee of $300 is the average

- Lenders Legal Fee - Not charged by all lenders, but to be safe budget between $300-$600.

- Lenders Mortgage Insurance (LMI) - this one-off payment applies unless you have a deposit of at least 20%.

Government charges - Property transfer stamp duty is a state government tax payable by the buyer and is calculated on the price paid for the property. As it is a duty for transferring the title of a property, it will be imposed regardless of whether your property purchase is financed with a mortgage.

You could potentially also face a number of other government charges including a property transfer fee, mortgage stamp duty and a mortgage registration fee, these all tend to vary by state, so check with your local state to confirm these fees.

Home and contents insurance - This is designed to protect you financially should your home or belongings be damaged by fire, storm and in some cases, flood, or you experience loss through burglary. It’s common for lenders to insist on this type of policy being taken at the same time the mortgage is signed.

Mortgage protection insurance - For peace of mind this policy covers part, or all, of your mortgage payments if you get injured, become too ill to work, or even die.

Legal fees - Property conveyancing fees typically cost around 2% of the price of the property.

 

Mortgage Brokers - How can they help?

Getting your first home loan is a big decision that you want to get right. To help navigate the mortgage selection and purchase process many first homebuyers use the services of a mortgage broker who offer expertise and guidance through the whole process.

What can a mortgage broker can do for you?

  1. Provide mortgage advice based on a detailed understanding of your circumstances, needs and goals.
  2. Compare a range of home loans from a wide choice of lenders to help you work out the options that suit you.
  3. Calculate how much you can borrow, based on your current financial circumstances, and what your likely monthly repayments would be to establish what your home buying budget is.
  4. Explain all the costs associated with a home loan.
  5. Prepare the paperwork, lodge the home loan application and take care of all the administration and follow-ups.
  6. Help you complete and lodge an application for the First Home Owners Grant.
  7. Negotiate the right and best deal for your needs with the lenders.
  8. Explain the steps involved in the home buying process.
  9. Liaise with your lender to get an indicative approval and provide any additional information if required.
  10. Provide property details, such as contracts, to your lender once you've found your property and liaise with the lender until final approval is provided.
  11. Confirm the information and documentation your solicitor or conveyancer will need from you to complete the purchase.

When meeting with a mortgage adviser it is wise to be prepared and to have your list of questions ready, here’s our list which may act as a useful starting point:

  • What percentage of the property value can I borrow?
  • How much can I borrow?
  • Will I have to take out lender's mortgage insurance? If so, how much will it cost?
  • What types of home loans are available?
  • Which home loan will suit my needs and lifestyle? Why?
  • What up-front fees can I expect?
  • Can I make extra repayments to my home loan?
  • Which home loans offer free redraws?
  • Will I have the ability to defer repayments?
  • How long will it take to process my application?  

 

Top 7 mistakes first homebuyers make

Buying your first home can be both exciting and daunting in equal measures and you can often feel lost in the process, as everything is new. To help you navigate through the process we have outlined the 6 most common mistakes first homebuyers make, avoid these and your property purchase will be that little bit smoother:

1. Minimize the changes in your circumstances - When applying for your home loan try to avoid making any significant changes to your circumstances such as a change in jobs or taking on another loan, to buy a car for example. By minimizing these changes you will be considered a good risk to the lenders that will assist your application and potentially influence the rate they will offer..

2. Get your home loan pre approved - By getting your home loan pre approved you achieve 2 important benefits. Firstly you know exactly what your budget is when searching for your new home and secondly when you find the property you wish to purchase you can act quickly which is an important in such a competitive market.

3. Over stretching yourself financially - By borrowing the maximum loan amount the lender is prepared to lend, you are running the risk of stretching yourself to a position where you will be unable to make your repayments.

4. Buy with your head not your heart - Buying your first home will probably be your largest purchase in your life to date, so getting it right is important. When negotiating the price of your house purchase or bidding at auction let your head lead the process to avoid over paying for the property.

5. Employ a good conveyancer or solicitor to check the legal documents - Not checking out things such as council zoning, building approvals and restrictive covenants can be an expensive mistake which will not only add legal costs in the future but may also inhibit your ability to re sell the property in the future..

6. Consult the experts on renovation projects - Buying a home that requires renovation can be a good option so long as you have the skills and funds to complete the project. Many first homebuyers underestimate the amount of work involved in renovating a property and find themselves with unfinished renovations as they have under budgeted for the work. To avoid this engage the expertise of a certified builder before you buy and renovation project home, so you can get an accurate estimation on the funds required to complete the renovation to your specification.

7. Insuring your new home - With so many things to think about when moving into your new home its easy for some tasks to get forgotten about. Organizing buildings and contents insurance on your new home is one such thing that often gets forgotten. Without the correct insurance cover on your home and contents you are both in breach of your home loan contract and taking an enormous risk, as if for example your home was lost in a fire, you would have no ability to claim on your policy.