Your first mortgage: What you need to know

By Niko Iliakis ·

Unless you have enough saved up to buy a property outright, chances are you’ll have to take out a mortgage to get your hands on that dream home. But for those who have never had one before it can be difficult to understand the ins and outs, and all that unfamiliar jargon doesn’t make things any easier. To help make the road to homeownership just a little bit less stressful, we’ve answered some common questions below.

How much can I borrow?

When determining how much you can borrow, lenders will consider a number of factors, chief among them your income and spending habits, and work out whether there’s room in your budget for regular home loan repayments.

Your borrowing power will also depend on your credit score and credit history. These will tell lenders how many credit applications you’ve made in the past, how much money you’ve borrowed, and whether that money was paid off in a timely fashion. If your credit history is free of any black marks, such as unpaid debt or defaults, it should put you in good standing.

Note: as the current economic crisis drags on, many banks are exercising more caution when assessing home loan applications. Some have tightened lending restrictions for those in hard-hit industries, and are also subjecting applicants who are employed on a casual, contract, or self-employed basis to greater scrutiny. This can make it harder to get approved for a loan or for the amount you want.

What is conditional approval?

Conditional approval, or pre-approval, is a lender’s estimate of how much you’ll be able to borrow based on your current financial situation. It’s an essential step in the home buying process, not just because it helps you narrow down your search to properties you can afford, but because it signals to real estate agents that you’re serious about buying.

Since it’s usually only valid for 90 days, it’s best not to apply for conditional approval too early. Try to secure it once you’ve saved up a deposit and have a sense of the type of property and suburb you’re interested in. Remember: conditional approval isn’t a guaranteed offer of finance. And if your financial situation changes while you’re looking for your new home, it’s a good idea to renew it.

How big a deposit do I need?

Generally, borrowers are expected to have a deposit of 20% of a property’s value. That means if the purchase price of your home is $500,000, you’ll need to have saved up $100,000. While it was possible to get a loan without any deposit in the past, nowadays lenders prefer a Loan to Value Ratio (LVR) of 80% as it limits their exposure to risk.

If you’re short of the requisite deposit, lenders will ask you to purchase Lenders Mortgage Insurance (LMI), which can cost up to 3% of your home loan amount (and will be included as an upfront cost or built in to your loan repayments). This protects them from loss in case you wind up defaulting on your loan.

Avenues exist for those with a low deposit to bypass the need for LMI, such as qualifying for the First Home Loan Deposit Scheme (which we’ll discuss below). Some lenders have even begun to offer discounts for eligible borrowers. For example, St.George recently lowered the cost of LMI to just $1 for first home buyers with a 15% deposit.

Home loan help: Am I eligible for any grants?

There are a number of programs in place to assist first home buyers, such as the First Home Loan Deposit Scheme (FHLDS). Under the scheme, 10,000 eligible first home buyers can purchase a home with a deposit of just 5%, with the remaining amount guaranteed by the government. 

The FHLDS was first launched on 1 January, 2020, and the second round (which went live 1 July, 2020) is currently underway. The scheme can also be used along with any other grants and concessions applicants may be eligible for, potentially making the journey to home ownership even easier.

More assistance is available through the First Home Owners Grant (FHOG), a national scheme that subsidises the purchase or construction of new homes. The amount offered and the eligibility criteria differ across states and territories, so be sure to read over the details on the relevant revenue office website. 

Sometimes criteria will vary within states. For example, if you are buying a home in regional Victoria and qualify for the FHOG, you will receive $20,000. However, if you’re buying elsewhere in Victoria, the amount available is capped at $10,000. 

In June 2020, in response to worsening economic conditions brought about by the pandemic, the Government also introduced the Homebuilder Scheme. This grants eligible owner-occupiers $25,000 to build a new home or substantially renovate an existing one. 

While a big reason behind its rollout was to help the residential building sector, which was facing a significant reduction of work in the pipeline, it can be a boon for first home buyers who can meet the (admittedly high) eligibility criteria.

Are there any upfront costs?

Along with the deposit, there are a few upfront costs you’ll need to budget for when taking out a loan. The biggest one will most likely be stamp duty, which varies in cost depending on the property and which state or territory you're in. 

As a first home buyer, however, you may be entitled to a stamp duty discount (as in NSW and Victoria, where stamp duty costs have been waived for first home buyers purchasing homes up to a certain value), so make sure to check if your state or territory has any policies in place to help you out.

If you’re buying a house, you’ll also need to conduct a pest and building inspection. Sometimes these are handled by the real estate agent, who will then charge a fee of around $50 for access to the report (which is much cheaper than paying $500 or so to organise a check yourself). 

Legal and conveyancing fees will also set you back hundreds or even thousands of dollars. These will pop up around the time the property is settled, when a lawyer or licensed conveyancer is brought on to review the contract of sale, draw up a transfer of land, and handle any other necessary legal paperwork.

Home loan repayments: How can I save on interest?

Use an offset account: If your loan comes with an offset account, you’ll want to take advantage of it as much as possible. Essentially, it functions like a savings account but with one key difference: it allows you to offset the balance in your account against the interest you owe on your home loan. 

That means if you owe $500,000 on your mortgage and have $50,000 in your offset account, you’ll only have to pay interest on $450,000. Consider automating the process by having your salary deposited directly into your offset account.

Increase your repayments:
If you receive a pay rise, or if you’ve eliminated certain expenses and found you have more in savings at the end of each month, consider making extra contributions to your home loan. Increasing the size of your repayments can help reduce the amount of interest accrued over the life of the loan, potentially shaving years off your mortgage.

Increase the frequency of your repayments:
If your lender calculates fortnightly repayments by halving the amount you’re paying monthly, and weekly repayments by dividing that amount by four, you could pay off your home loan faster by paying on a weekly or fortnightly basis. 

To illustrate, say you’re paying $2,000 every month, which adds up to $24,000 a year. If you switched to paying $1,000 every fortnight, by the end of the year you’ll have paid back $26,000, the equivalent of an extra month.

If you’re gearing up to enter the property market, make sure to read over these essential first home buyer tips for more information. And if you’re unsure where to start when it comes to finding a loan, visit our home loans comparison page for an overview of what’s available

Home loan comparisons on Mozo - last updated November 21, 2020

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