Home Loans for First Home Buyers
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What is a first home buyer loan?
A home loan is an amount of money lent by a bank or other financial institution to finance the purchase of a residential property. A first home buyer loan is a loan that is designed for people who are looking to take their first step onto the property ladder.
Home loan lenders will often offer special deals and discounts to attract first home buyers. There are typically a range of deals and offers available, from rebates on the purchase price of the home to reduced or waived ongoing or annual fees.
What is the best first home loan?
When it comes to home loans, the ‘best’ choice for you will come down to your individual circumstances. There are three types of interest rates and two repayment types commonly available on home loans, and you have the ability to weigh up your options and decide which combination of these is best-suited to your needs.
The three main home loan interest rate types are variable rate, fixed rate and split rate, and the two main repayment options are principal and interest and interest-only.
Home loan interest rate types
Home loan repayment types
Principal and interest home loans
A home loan with principal and interest (or P&I) repayments is one where you pay back the money you borrowed from the lender – also referred to as the ‘principal’ of the loan – at the same time as you pay off the interest your lender charges you. This means the amount you repay each week, fortnight or month is likely to remain fairly stable throughout your loan, unless your lender changes your interest rate or ongoing fees.
Interest-only home loans
Interest-only (IO) home loans are loans in which only the interest portion is paid off, not the principal, for the first one to five years of a loan, before the loan reverts to P&I repayments. As a result, your repayments may be cheaper initially but are likely to go up substantially once you start paying off the principal component.
In Australia, this type of loan is more popular among property investors than people buying a home to live in, although it may also be attractive to people who want cheaper initial repayments on their first home.
However, Moneysmart warns that the interest rates for these types of loans are often higher than principal and interest loans, and you will likely end up paying more over the life of the loan because you are not in fact paying off the property itself during the interest-only period.
What documents do you need when applying for a first home loan?
When you apply for a home loan, lenders will typically ask to see key documents to prove your identity. They will also want to get a picture of your financial situation when deciding how much money they are willing to lend you, and for this reason, they will typically ask to see documents such as pay-as-you-go (PAYG) payslips and bank statements, to verify your income and savings.
Lenders will also want to know about any liabilities and debts you might have, such as HECS and HELP balances and credit card or buy now pay later debts, and they may even wish to see a list of your monthly expenses to get a picture of your budget and determine the size of loan that you might be able to repay.
How much can you borrow for a first home loan?
When you apply for a home loan, lenders will consider your borrowing power. This describes the amount of money you might be able to borrow, based on factors such as your income and expenses, how much you have saved as a deposit as well as any debts you might have. If you are curious about your borrowing power, Canstar’s calculator might be able to help you.
Explore: Calculate your borrowing power
What is the best amount to save for a first home deposit?
In general terms, 20% of the value of the property you’re buying is preferred for a home loan deposit. About 10% is the minimum amount required for a home loan deposit, depending on your chosen lender, but ideally, it is advisable to have as large a deposit as possible saved before buying a home. This is because the greater your deposit, the less money you will need to borrow, and the less interest you’ll end up paying to your lender. Some lenders may also reserve their sharpest rates for borrowers with a high deposit, or in other words a low loan-to-value ratio (LVR).
If you are borrowing more than 80% of the value of the property, you will typically be required to pay lenders mortgage insurance (LMI). This is not a monthly or annual premium like other types of insurance, but is instead an amount that’s either paid upfront or added to your mortgage for you to repay over time, as a means for your lender to protect themselves in the event of a default.
From time to time, lenders will offer LMI discounts to eligible first home buyers, or even waive LMI entirely. If you are shopping around for a home loan, it could be worth comparing or asking prospective lenders if they have such a deal available.
How can you save money on a first home purchase?
There are a number of ways that first home buyers in Australia can save money on their purchase, in the form of various government grants and concessions. These include state-based stamp duty concessions or exemptions, as well as the First Home Super Saver Scheme (FHSS), the First Home Loan Deposit Scheme (FHLDS) and the Family Home Guarantee.
What is the best way to get a first home loan?
In general terms, the process of purchasing a first home, including applying for finance, can be broken down into a number of steps. These are:
- Save for a deposit, keeping in mind the fact that with a 20% deposit or more, you will not need to pay LMI.
- Research the available government concessions like stamp duty discounts and first home buyer schemes to see if you are eligible for any.
- Consider your budget and how much you would ideally like to spend on a first home, as well as the type of home you wish to purchase.
- Gather the documents you’ll need to apply for a home loan, such as bank and credit card statements and payslips.
- Consider applying to a home loan lender for pre-approval. This is an optional step, and it’s important to note having pre-approval doesn’t guarantee you’ll be officially approved for a home loan, but it can give you an idea of where you stand financially and how much you will be able to borrow for a home.
- Start the hunt for a house or apartment that fits your particular needs and budget, and make an offer on it or bid at auction.
- Get unconditional approval from your lender to allow you to borrow the funds for the purchase of the property.
- Begin repaying your mortgage once your purchase of the property settles.
How can first home buyers compare home loans?
If you’re an aspiring first home buyer in the market to compare home loans, Canstar’s First Home Buyer Award can be a place to start. Every year, our Award is given to the financial institutions on our database found to provide the strongest combination of products and services to first home buyers. You can also compare home loans using the tool on Canstar’s website.
If you would like to know more about applying for a first home loan and are curious about what you might need and how to improve your chances of being approved, you can read Canstar’s guide to some of the key things that home loan lenders look for. You can also read Canstar’s checklist on how to apply for a home loan.
Author: Nina Tovey, Canstar Editor-in-Chief
As Canstar’s Editor-in-Chief, Nina heads up a team of talented journalists who research and write articles to provide our readers with valuable insights about the home loan and property markets. Previously Nina founded her own agency where she provided content and communications support to clients around Australia for eight years. She also spent four years as the PR Manager for American Express Australia, and has worked at a Brisbane communications agency where she supported dozens of clients, including Sunsuper and Suncorp.
Nina has ghostwritten dozens of opinion pieces for publications including The Australian and has been interviewed on finance topics by the Herald Sun and the Sydney Morning Herald. When she’s not dreaming up ways to put a fresh spin on finance, she’s taking her own advice by trying to pay her house off as quickly as possible and raising two money-savvy kids.
Nina has a Bachelor of Journalism and a Bachelor of Arts with a double major in English Literature from the University of Queensland. She’s also an experienced presenter, and has hosted numerous events and YouTube series.
You can follow her on Instagram or Twitter, or Canstar on Facebook.
You can also read more about Canstar’s editorial team and our robust fact-checking process.
Author: Josh Sale, Home Loans Ratings Manager
As Canstar’s Ratings Manager, Josh Sale is responsible for the methodology and delivery of Canstar’s Home Loan Star Ratings and Awards. With tertiary qualifications in economics and finance, Josh has worked behind the scenes for the last five years to develop Star Ratings and Awards that help connect consumers with the right home loan for them.
Josh is passionate about helping consumers get hands-on with their home loans, always reminding home buyers that finding the right loan can be as important for your finances as negotiating a fair property purchase price. Josh has been interviewed by media outlets such as the Australian Financial Review, news.com.au and Money Magazine, discussing topics including home loan equity and wider finance trends.
When it comes to Josh’s own property journey, the home loans expert once bought two houses in the same transaction when he ensured the cubby house his daughter loved was listed on the purchase contract for his new home. You can follow Josh on LinkedIn, and Canstar on Twitter and Facebook.
This content was reviewed by Deputy Editor Sean Callery and Sub-Editor Tom Letts as part of our fact-checking process.
Important information
For those that love the detail
This advice is general and has not taken into account your objectives, financial situation or needs. Consider whether this advice is right for you.