First home buyers - what you need to know

By Olivia Gee ·

The feeling of picking up the keys to your very first home is priceless. No more rent hikes, evictions or inspections to deal with – and you can even own a pet without landlord drama! Plus, purchasing property is generally a good investment, as your home should appreciate in value over time.

But before you get to the stage of packing boxes and choosing which colour paint and planters you’ll use to jazz up your new home, there are a few must-dos to land the property of your dreams.

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1. Workout how much you can afford to borrow

Start by punching your numbers into our home loan borrowing calculator, to get an idea of how much you can realistically afford to pay off.

For example: First home buyer Tom has an annual income of $62,000, this means he can comfortably afford to borrow around $400,000 over 25 years.

Remember to read our 'how much can I borrow' guide which also reveals the hidden costs of purchasing a property.

2. Save for a deposit

Once you’ve figured out your borrowing power, then you’ll have an idea of how much you will need to save for your dream home. When it comes to saving up that first home loan deposit, consider taking advantage of the First Home Saver Super Scheme, which allows you to make additional super contributions and withdraw the funds later.

As you’ve probably heard, a solid plan is to save up a deposit amount of 20% of the property value, as this will give you a loan to value ratio (LVR) of 80%. Banks in Australia use your LVR to work out whether they will lend to you, so the bigger your deposit (and the lower your LVR), the more likely they’ll approve you for the loan.

For example: In order for Tom to have a 20% deposit on a $400,000 property, he will need to save $80,000. However, if Tom like many first home buyers decides he wants to get into the property game sooner and goes for one of the low deposit loans available (with only a 10% deposit of $40,000), he will have to pay lenders mortgage insurance (LMI). This is an insurance the provider takes out to protect themselves financially if you are unable to repay the home loan. While Tom has the option of paying this variable cost upfront, he can also add the cost to his home loan.

3. Choose the area

We recommend conducting a little recon work using real estate search engines like realestate.com.au and domain.com.au to see how far your green will go. It’s also a wise idea to search the suburb you’re considering on homepriceguide.com.au to get an idea of the growth potential of the area.

The two scenarios below show the difference that a $400,000 budget will get Tom in two different areas of Sydney:

Scenario 1: Tom works in Sydney's CBD and is after a first home that will make getting to work a breeze. At the time of writing, if Tom wanted to reside close to the CBD his $400,000 budget would generally only get him a studio apartment, with no parking facility.

Scenario 2: If Tom decides he is willing to commute to work, moving out to the Western Suburbs of Sydney, this could mean Tom is able to purchase a two bedroom apartment with a lock up garage and rent out the additional room to cover part of his home loan repayments.

4. Check your first home owners grant eligibility

Getting a foot in the property door isn’t easy. That’s why each state has their own first home owners grant and eligibility

First home owners grant scenario: Since Tom lives in NSW, if he decides to purchase a brand new or off-the-plan property he can access a $10,000 grant if the property is valued under $600,000 (or up to $750,000 if he's buying land). He'll also pay no stamp duty (on property worth less than $650,000) thanks to the First Home Buyers Assistance Scheme, with concessions up to $800,000 available. However, Tom will have to consider whether the savings from the grant is worth paying more for a new or off the plan property in the booming Sydney market.

As mentioned earlier, the First Home Saver Super Scheme is also well worth reading about if you want to ramp up your savings strategy for that home loan deposit.

5. Get a copy of your credit report

By obtaining a free copy of your credit report before you apply for a home loan, you’ll be able to check all the information is correct, and you won’t be knocked back for a home loan due to a red mark against your name.

Scenario: Tom decides to get a copy of his credit report and finds he has a bad credit score due to a student credit card and car loan he missed repayments on. Thankfully, Tom can improve his credit score before he applies for a home loan. Some moves he can make include consolidating his debt to help pay it off sooner, and ensuring he is putting money away each month into a high interest savings account to show his strong savings ethic.

Keep in mind, banks will usually ask for three months worth of bank and savings account statements when you apply.

6. Compare home loans

You might be inclined to take out a home loan with the provider you’ve been banking with since your first kids saver account. But being ‘loyal’ could end up costing you thousands over the life of the loan in interest. So it’s a good idea to compare home loans online, which you can do using our first home buyers comparison table.

Scenario: Tom is offered a 4.00% interest rate by his current lender but decides to see what’s on offer from smaller providers in the market and finds a better deal at 2.50%. If Tom goes for the lower option, our home loan comparison calculator shows he would save $83,181 in interest over 25 years on a $360,000 home loan ($400,000 - $40,000 deposit).

Apart from the interest rate, also consider the features below when you start your house hunt.

Fixed interest rate: There are two different rates you can choose between in the home loan world - fixed or variable interest rate. The fixed rate option is a popular choice for first home buyers, as it means your repayments will never change over the fixed rate term (usually 1 to 5 years). Just be mindful fixed rate loans may not come with some flexible features like an offset account or extra repayments facility (see below for a full definition).

Variable interest rate: With the variable rate option your repayments could change at any time - so you’ll benefit if rates go down but have to budget for an increase in repayments if rates are hiked up. See how much a rate change could affect you with our rate change calculator. The ultimate benefit of a variable rate home loan is that you can enjoy more flexibility.

Offset account: When you factor tax and inflation into the equation, leaving your money in a high interest savings account isn’t always the best option. An offset account allows you to reduce the amount of interest you pay on your home loan. It's just like a regular bank account, which you can deposit your salary into and comes with a debit card for everyday purchases. The money that's in the account is offset against your home loan balance. Scenario: Say Tom has $20,000 in an offset account. That $20k will be offset against the $360,000 he owes, meaning he would only be charged interest on $340,000 of the home loan.

Extra repayments: When it comes to paying off your home loan every little bit counts, so make sure the mortgage you sign up with allows you to make extra repayments without charging any fees. Scenario: A year after Tom takes out his home loan he gets a promotion and decides to put some of his extra pay towards his loan by making an additional monthly repayment of $200. Our extra repayments calculator shows that this would save Tom $33,147 in interest and reduce the life of the loan by 3 years and 7 months.

Redraw facility: All those extra repayments can do wonders to the amount of interest you pay, but there could be a time when you need to dip into those funds in an emergency or to cover unexpected events or projects. A redraw facility, which allows to take out those extra dollars to put into the loan, could come in handy. But of course this will mean your home loan will stick around longer!

Flexible repayment cycle: You my want to align your home loan repayments with your salary for convenience, but it could also save you cash. By making repayments fortnightly instead of monthly, you will ultimately pay off an extra month each year. Scenario: Say Tom’s monthly repayments are $1,900. Over a year he will have paid off $22,800. But if he opts for the fortnightly option of $950, when the year comes to an end he will have paid $24,700 back.

7. Get loan pre approval

Last but not least, when you find a home loan provider that ticks the boxes for you, get your loan pre approval organised. This is an obligation free approval, which means you can put an offer down once you’ve found the perfect property. Just keep in mind, pre approval usually only applies for three months.

What’s next?

  • Want more helpful tips for purchasing your first property? Then our bustling first home buyers hub should be your next stop full of handy hints and tips to get you closer to your home ownership dream.
  • Take out home and contents insurance. When the property is officially yours, don’t forget to get a comprehensive policy that will protect you financially if anything were to happen to your home, furniture, tools and any other contents in your home. You can compare home insurance deals here.

*WARNING: This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan. The comparison rate displayed is for a secured loan with monthly principal and interest repayments for $150,000 over 25 years.

**Initial monthly repayment figures are estimates only, based on the advertised rate, loan amount and term entered. Rates, fees and charges and therefore the total cost of the loan may vary depending on your loan amount, loan term, and credit history. Actual repayments will depend on your individual circumstances and interest rate changes.

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