Home Loans for first Home Buyers

When it comes to deciding which home loan suits your needs, one consideration should be  how the interest rate is applied to the loan. There are three main interest rate types: Variable, fixed and split.

1. Variable rate home loans

Variable rate home loans have a variable interest rate attached, meaning the interest you pay can go up or down at any time. The timing size and direction of these changes will be set by your lender, usually based on a range of economic factors, such as changes made by the Reserve Bank of Australia (RBA) to the official cash rate.

Variable rate home loans also often come with features such as linking an offset account, redraw facility or the ability to make extra repayments.

2. Fixed rate home loans

Fixed rate home loans have the interest rate stay the same throughout an initial part of the loan – usually ranging from one to five years – before reverting to variable. This means your repayments stay the same throughout that initial period, regardless of whether the cash rate or your lender’s variable rates go up or down.

At the end of a fixed term, you may be able to extend or ‘roll over’ the fixed-rate portion of your loan if your lender agrees to this. Otherwise, you can typically choose to either move into a variable rate home loan, or refinance to either a split-rate home loan or another fixed-rate home loan.

Fixed rate home loans can provide greater certainty than variable ones, but they generally come with fewer features or less flexibility.

3. Split rate home loans

Split home loans are a combination of variable rate and fixed rate home loans, and allow you to choose what percentage of your loan has a fixed rate and what percentage has a variable one.

However, the ability to split your home loan is not always offered and could depend on the rules of the lender, so it is always worth checking whether a particular loan you are considering can be used as part of a split arrangement.

Additionally, although the variable rates aspect of a split home loan can still come with features, there may be restrictions or limits to those features compared to a variable-rate-only home loan. And, it’s important to remember that if interest rates change, so too will your repayments change on the variable portion of the loan.

Another consideration should be repayment type – if your repayments will go to paying off the principal as well as the interest; or just the interest component of the loan:

1. 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.

2. 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.

The ‘best’ amount to save for a home deposit depends on a number of things, such as where you want to buy, how much you are prepared to pay in fees, and if you have access to any government schemes (or a guarantor) that could help you buy your first home.

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 in the long run. 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).

Learn more: What is a Loan to Value Ratio (LVR)?

Why do people say you need a 20% deposit?

Traditionally, the benchmark ‘best’ amount for a deposit has been 20% of the value of a property, which is the limit at which lenders typically start to include extra home loan approval conditions and fees (such as LMI, explained below).

As housing prices have risen sharply over time, this 20% benchmark figure has prevented many people, especially first home buyers, from getting a home loan. For example, if you wanted to buy a house that cost $600,000, a 20% deposit would be $120,000; you’d need a $200,000 deposit to buy a $1 million home. To try and combat this, various government assistance schemes have been launched to help certain buyers who may not have a 20% deposit buy a home (more on this, below).

Check out: First Home Owners Grants

Can you get a loan without a 20% deposit?

While it may be a little more difficult to get a loan, it is possible to find home loans available for those without a 20% deposit. (You can use the table at the top of this page to see a range of loans from our Online Partners for different deposit amounts, using the appropriate LVR filter.) However, there could be more fees for these loans, and you may need to provide more information in the approval process.

For example, if you’re 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. This insurance covers the lender (and not you) if you can’t pay back your loan. Check the extra costs with your lender.

You may also have to show your lender how you saved up your deposit, if they want to determine if it qualifies as “genuine savings”.

From time to time, lenders will offer LMI discounts to eligible first home buyers, or even waive LMI entirely. Factors such as your occupation could also lend yourself to such offers. 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.

Explore further: How Much Deposit do I Need for a 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.

Here is a general list of documents lenders will likely ask for when applying for a home loan for the first time:

• Proof of identification
• Proof of employment (such as pay-as-you-go (PAYG) payslips)
• Extra income and assets
• Expenses (such as bank statements)
• Debts
• What you want to buy or build
• Deposit or grant help
• Conveyancer’s or solicitor’s details

Lenders will also check your credit score when you enquire or apply for a home loan. A credit score can become a deciding factor for some lenders so it’s important to know what your credit score is when you’re looking for a home loan.

Check your credit score for free

How much you can borrow for a first home loan depends on many factors, such as how much you need, and, ultimately, how much money a lender will loan to you. 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

Another way to work out how much you might be able to borrow is to research the market and then apply for conditional approval for a home loan (also called pre-approval). This could give you an idea of how much you are able to buy a home for, before you start looking.

If you’re an aspiring first home buyer in the market to compare home loans, you can use the comparison table at the top of the page to explore first home buyer loan rates on Canstar’s database.

You could also see Canstar’s First Home Buyer Awards as a starting point . 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.

Canstar’s First Home Buyer Awards

There are a number of ways that first home buyers in Australia can get some help to enter the market. This includes various government grants and concessions, including state-based stamp duty concession or exemptions, as well as the First Home Super Saver Scheme (FHSS), the First Home Guarantee (formally known as the First Home Loan Deposit Scheme), the Regional First Home Buyer Guarantee (RFHBG) and the Family Home Guarantee.

Stamp duty concessions

Stamp duty is a tax that is payable on the purchase of a property, but a number of state and territory governments offer concessions and exemptions for first home buyers. The exact terms differ on a state-by-state (or territory) basis. You can read Canstar’s guide to first home owner grants and concessions to find out what you may be eligible for.

The First Home Super Saver Scheme

First home buyers may also be eligible for the FHSSS. This is a scheme that allows you to make voluntary (before tax) contributions to your super fund that you can withdraw to use as a house deposit. At present, you can make contributions of up to $15,000 per financial year, subject to your normal super contribution caps.

The First Home Guarantee

The First Home Guarantee (FHBG) scheme, formally known as the First Home Loan Deposit Scheme, exists to help eligible first home buyers get a foot on the property ladder. The scheme assists eligible low- and middle-income earners in buying or building their first home, with the Australian Government partially guaranteeing home loans with as little as a 5% deposit and no LMI.

In order to be eligible for the scheme, the property purchased must be an eligible residential property, such as an existing house, townhouse or apartment; a house and land package; land and a separate contract to build a home; or an off-the-plan apartment or townhouse.

For more information about the scheme, participating lenders and available places, you can visit the NHFIC website. If you make use of this scheme, you may also be eligible for other offers. For example, you can apply for a position in the FHBG and utilise the FHSS, as well as consider any applicable state or territory first home grants and stamp duty concessions.

The Regional First Home Buyer Guarantee

This scheme aims to help Australians living in rural areas purchase their first home. The RFHBG scheme is very similar to the FHBG, where eligible regional home buyers will have part of their home loan guaranteed by the government, allowing for deposits of as little as 5% without requiring them to pay for LMI. The scheme offers 10,000 guarantees each financial year, until 30 June 2025.

To see which areas are eligible for this scheme and more information, you can visit the NHFIC website for details.

The Family Home Guarantee

This scheme exists to help single parents with dependent children purchase a new or existing home with a deposit as low as 2% with participating lenders. The government will guarantee the remaining 18% of the deposit. This can be useful for single parents who would otherwise need to save up a full 20% deposit or pay LMI, which could cost thousands of dollars.

From 1 July 2021, the Family Home Guarantee is available to 10,000 places, which is made available over four financial years. For the 2023 to 2024 financial year, there are 5,000 places available, according to the Government’s National Housing Finance and Investment Corporation.

Bear in mind that while obtaining a place in the FHLDS or Family Home Guarantee could save you money on LMI premiums, buying a house with a 2% or 5% deposit still means you are likely to pay more in interest over the life of your home loan than if you were able to save up a 20% deposit on the same property or a cheaper one.

Buying a property – especially the first time around – is a big decision. Thankfully, Canstar has developed some handy checklists to help you through the process of buying your first home:

• Checklist of tips for applying for a home loan
• What do lenders look for in a home loan application?
• Guide to the First Home Guarantee
• Guide to first home owner grants and concessions

We also have a whole lot of other tips and guides for home buyers, including the following:

• How to apply for home loan pre-approval
• How to calculate interest on a loan
• How much do you need to earn to afford a home in your capital city?
• 5 tips for making a pre-auction offer
• 4 ways to save for a home deposit
• Checking the contract when buying a house
• 12 red flags to look for when inspecting a house
• A first home owner’s guide to home insurance
• Guide to home warranty insurance
• Are weekly, fortnightly or monthly home loan repayments better?
• Buying your first home: 5 property experts share how they did it
• Rentvesting: what do to and the pros and cons
• What to do in a property boom

Please note that these are a general explanation of the meaning of terms used in relation to home loans or mortgages.

The wording of loan terms and conditions may use different phrases or terms from the ones defined here, and you should read the terms and conditions of the relevant loan to understand the features and cost of that loan. You cannot rely on these terms to be part of any loan you may take out, and the definitions used here should only be a guide.

Refer to the lender’s Key Facts Sheet and other applicable product documentation, and see Canstar’s Financial Services and Credit Guide (FSCG).

Refer to the product disclosure statement (PDS) and Canstar’s Financial Services and Credit Guide (FSCG) for more information.

• Annual percentage rate (APR): This is the total charge for the loan including fees and interest expressed as a percentage, which allows you to compare across the market.
• Comparison rate: An interest rate figure that represents the total annual cost of the loan, including the annual interest rate, monthly repayments, and most ongoing and upfront fees and charges. Under the law and on the Canstar website, all comparison rates for home loans are based on a $150,000 loan over 25 years (read the comparison rate warning). Learn about comparison rates.
• Credit rating (credit score): An assessment (typically performed by specialised credit bureaus) of the creditworthiness of individual borrowers, based on their borrowing and repayment history (credit report). Lenders consider your credit rating when deciding whether or not to give you a loan, how much to loan you, and what interest rate you will pay. You can check your credit score for free with Canstar.
• Deposit: In the context of home loans, a deposit is a percentage of the purchase price that you will typically need to save and pay upfront. Find out more about home loan deposits and how they work.
• Debt-to-income ratio: A comparison that takes in the amount of debt you have relative to your overall income. Lenders may use this calculation as a way to measure your potential eligibility for a loan. Learn about debt-to-income ratio.
• First Home Guarantee: The First Home Guarantee, formerly known as the First Home Loan Deposit Scheme, is a government initiative designed to help Australians buy their first home. The scheme is a government guarantee which will secure the mortgages of some low- and middle-income earners with a deposit of as little as 5% of a property’s value, and help them avoid paying Lenders Mortgage Insurance premiums. Eligible first home buyers could purchase a variety of residential properties under the scheme, including an existing house, townhouse or apartment; a house and land package; land together with a separate contract to build a home; and an off-the-plan apartment or townhouse. However, not all lenders are involved in this scheme.
• First Home Owner Grant (FHOG): A government grant given to first home buyers. Learn what first home owner grants are available in your state or territory.
• Fixed rate: A fixed rate home loan allows a borrower to lock in an interest rate for a particular period of time, typically from 1 year up to 5 years. The interest rate that the borrower pays will remain the same for that amount of time, regardless of changes in the RBA cash rate.
• Guarantor: If someone ‘goes guarantor’ on your loan, it means that they are promising (‘guaranteeing’) that they will be liable for the loan if repayments are not made. The guarantor also means they must be able to demonstrate their own capacity to repay your loan. Learn about guarantors on home loans.
• Introductory rate or honeymoon rate: An introductory rate offered to entice borrowers with a low advertised rate for the first few months of the loan. After the honeymoon period, the loan reverts to the standard variable rate offered by the lender. Use our Honeymoon Rate Calculator to estimate the cost of the loan over a specific period of time.
• Lenders mortgage insurance (LMI): Insurance that the loaning institution takes out in case of default from the borrower, which the borrower must pay for. Usually applies to home loans with a higher LVR (more than 80%). Learn about LMI.
• LVR (loan to value ratio): This is the maximum proportion of the value of your home that can be loaned out to you. For example, a bank may approve your loan for 80% of the property value, in which you must pay the remaining 20% as your deposit. Find out how LVR affects your interest rate and LMI.
• Negative equity: Negative equity is when the market value of your property is lower than the balance remaining on your home loan. Find out more about negative equity
• Negative gearing: When the income from an investment property is not enough to pay the interest on the home loan for that property, negative gearing is currently available as a tax deduction against that income. Learn about negative gearing.
• Offset account: A savings account linked to your loan to offset the interest charged on your loan. The money (or credit) in your account is offset daily against your loan balance, which reduces the daily mortgage interest charges. Learn about offset accounts.
• Positive gearing: When you borrow money to invest, and the income you earn from an investment is higher than your ongoing expenses, then the investment is positively geared. Learn about positive gearing.
• Pre-approval: An initial approval process where the bank provides a borrower with an estimate of how much they could borrow, based on information they have provided to the bank. Find out how to get home loan pre-approval.
• Principal: In the context of a home loan, the principal is the amount of money that you borrow from a lender. It can refer to the initial size of a loan, as well as the amount of money left to pay off on a loan.
• Redraw: A home loan feature that enables the borrower to withdraw funds they have already paid. Usually this is conditional on a borrower being far enough ahead on loan payments, and based on the loan they have been approved for. A redraw facility is not available on all loans. Learn about the pros and cons of redraw facilities.
• Settlement date: The date on which transfer of ownership officially takes place – the buyer pays the rest of the purchase price, and the final legal documents are exchanged. It is also usually the date on which the buyer receives the keys and assumes possession.
• Split loan: A home loan in which a predetermined portion of the loan is locked in at a fixed interest rate and the rest comes with a variable rate of interest. Learn about split loans.
• Stamp duty: The state or territory government’s tax calculated on the borrower’s loan amount. Calculate your stamp duty with our calculator.
• Variable rate: A home loan interest rate that fluctuates according to the official cash rate set by the Reserve Bank of Australia. The rate can go up or down over time, varying your repayments.