Home Loans

Home loans for first-time buyers

Your first step onto the property ladder is often the toughest. With no equity to your name, you need to raise a lot of money to buy your first home. Fortunately, you might still have options available.

| | 8 minute read

After a decade watching declines in housing affordability, it appears that first home buyers are starting to come back into the Australian property market.

Data released from the Australian Bureau of Statistics showed that first home buyers made up 17.6% of all owner-occupier housing loans in October 2017. This was the highest percentage share since November 2012.

In all, more than 10,000 loans were approved in the survey month for those looking to buy their first home. These were promising signs after a decade when it seemed first home buyers were becoming a rarity in Australia’s hot real estate market.

It’s never been easy, of course, to pull together what you need to buy your first property. Although home ownership has often been said to be a rite of passage for young Australians, many have chosen (or been forced) into renting or living with friends or family until they are prepared to plunge into the property pool.

Those wanting to buy their first home have to deal with loan applications and real estate agents for the first time, as well as all the associated administrative, financial and legal checks and paperwork. Not just that, but many have to battle with those looking for an investment property to achieve capital gains and tax advantages.

Here is some information on buying your first home and some strategies that might make the challenge a little easier.

The costs of buying a home

It’s tempting to look at the purchase price of your first home as the only financial commitment you need to make, but that could be a costly mistake. Some compulsory fees and changes run into many thousands of dollars, even for first home buyers. Leaving moving costs aside, extra charges associated with buying a home include:

  • Transfer fees and stamp duty: These government charges differ based on your state or territory and the value of your property. Many states have grants, waivers or concessions to help you cover the cost. Use our calculator to see how much you will need to pay.
  • Conveyancing: Conveyancers help you deal with the legal issues surrounding the property transaction. This fee typically varies from $700 to $1500, depending on the conveyancer.
  • Mortgage registration fee: This $150-$200 fee covers the name and mortgage change on the property’s title and varies from state and territory.
  • Lender fees: Many lenders charge additional fees for processing and settling home loan applications. This can cost you hundreds of dollars, though some lenders will waive their fees in certain circumstances.
  • Lender’s mortgage insurance (LMI): Lenders often take out LMI if you offer less than 20% of the home’s value as a deposit. The fee varies depending on the size of your deposit, the lender and the insurer. Some lenders charge as much as 5% of the property’s value.

Speak to a home loan consultant to find out more about the fees you have to pay when buying a house.

What lenders want from a property

Most lenders have preferred property types. Your intended home should meet the following conditions:

  • Has less than 2 hectares of land;
  • Is zoned for residential use, or has a freehold, Torrens or strata title;
  • Has no seller incentives or rental guarantees attached;
  • Is in good condition;
  • Nothing makes the property stand out as “unique”;
  • Has over 50 square metres of floor space. This is especially important for studio apartments, as lenders discount car space and balconies from their floor space calculations.

Having a property that doesn’t meet these conditions won’t prevent you from getting a home loan. It only makes the process more difficult.

How to choose the right home loan

With many products available, it can be tricky to compare home loans and choose the best one. While mortgage brokers can help, you can take steps to find one that suits you and your circumstances:

  • Don’t base your decision on the advertised interest rate. You need to check what features the loans comes with and any associated fees. Comparison rates, which combine the interest rate and fees assessed over the loan term (for example, whether it is over 25 years), offer you a more accurate idea of the real cost of your home loan.
  • Work out what loan features you would like. You need to decide on the length of the loan, whether you want the rates to be fixed or variable, or have features such as being able to make early repayments, pay through multiple channels or move your loan if you shift house. Others have offset accounts or offer the ability to redraw.
  • Find a lender you feel comfortable with, is transparent with their fees and charges and offers excellent customer service.

Brokers with an Australian credit licence can be a good resource but be wary – most, if not all, are paid commissions by lenders. They are unlikely to offer the variety you need to find the best home loan.

Please read this to find out more about how to choose the right loan. uno Home Loans experts can help you find the right loan and lender for you.

Why you need home loan pre-approval

Getting pre-approval on your home loan offers you the security you need to bid on a property while knowing that you can actually afford it.

Pre-approval comes to the fore if you buy a property at auction. Without it, you may find that you lose the deposit you paid for any properties you have won. This is because most states don’t allow a cooling off period after an auction, but expect you to pay the deposit instantly. In other words, if you find out you can’t get a loan, you lose the deposit.

Having pre-approval doesn’t guarantee that your home loan application will reach settlement. Lenders may take other factors into account once you’ve chosen a property. However, it’s much better to have it before sending out applications.

Call on your parents

Many first-time buyers ask their parents to act as guarantors for their home loan. A guarantor is somebody who offers their own property as security for the loan. If you default on your payments, your lender will go to your guarantor to settle the bill.

Almost two-thirds of first-time buyers use guarantors. They can help you avoid lender’s mortgage insurance and cover the costs of the other fees associated with buying a home. For example, with a guarantor in place, you can spend the money you save on stamp duty and home loan application fees.

Here is our guide to buying a home loan without a deposit.

How to take advantage of the First Home Owners Grant

The First Home Owners Grant (FHOG) is a leg-up available from state and territory governments to help first-time buyers. You can use this money to cover some your deposit, although many lenders will want to see that you have some genuine savings as well. It’s worth noting that you may not need to show that you have any savings if you combine the FHOG with a guarantor, who is prepared to take the risk for your loan.

Eligibility for the grant varies from state to state, depending on your circumstances and what you’re looking to do. It’s best to check beforehand so you have an idea of what’s available.

How much can I get with the First Home Owners Grant?

In most cases, the scheme offers a one-off payment. Many states, however, offer other incentive schemes that might be used alongside the grant to put towards financing your home loan.

You can apply for the FHOG when you lodge a home loan application with a lender. You don’t receive the funds until your loan reaches the settlement stage.

Using superannuation

Following the 2017 Federal Budget, you can use a portion of your superannuation to pay your deposit. From July 1, 2017, you have been able to make voluntary non-concessional (after tax) and concessional (before tax) contributions from your super account to save for a deposit.

After July 1, 2018, you are able to draw down from these contributions at the marginal rate applying to your account. You will receive a tax offset of 30% to help with this.

There are some limitations. The government has capped the amount you can withdraw from your super to $15,000 per year. You can also only use $30,000 from your super for your deposit.

What to do next

Now you know about the costs associated with buying a home, what lenders look for, and the help available to you as a first-time buyer. We recommend that you do the following:

Learn more about buying a home
Calculate how much you need to borrow
Live chat to one of our home loan experts

This information is general in nature, and you should always seek professional advice when making financial decisions.

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Alexi Neocleous

With over 20 years experience, Alexi has written extensively a wide cross section of financial topics. These topics range from financial planning, mortgages, property commentary and all points in between.

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