Home Loans For First Home Buyers

The “best” home loan for a first home buyer will come down to their individual circumstances, but typically it will depend on the value of the property, the size of deposit, features of the home loan product, and the upfront and ongoing costs.

Home loan experts say buyers, especially those purchasing their first home, often rely on feedback from the lender they have always banked with, or otherwise focus on the lowest interest rate available in the market. But they should instead focus on the overall cost of the loan, and on comparing and finding the best lender to suit their circumstances.

James Algar, a Sydney-based broker with Mortgage Choice, says using a lender offering the First Home Guarantee Scheme is a good example of the need to choose an appropriate lender.

“It’s only really available through nine or 10 different lenders. So only about a third of home loan lenders actually allow you to access a scheme where you might not have to put down anywhere near as much deposit and still get an amazing deal on your rate,” he says.

“If you go to one of the other (lenders) who aren’t part of the scheme, you may end up having to pay a lot of mortgage insurance or a much higher interest rate, or both.”

There are a range of additional benefits that first home buyers can access that are not available through every different bank, he said. These could include stamp duty waivers, reduced deposit, and no lenders mortgage insurance (LMI), among others.

Examples of First Home Buyer Loans

A number of lenders, including the Big Four banks as well as smaller lenders offer specialised home loans for first home buyers that typically require a lower minimum deposit than the industry standard of 20% for owner-occupiers at competitive rates.

Some examples include:

• Westpac Flexi First Option Home loan, with a minimum deposit of 5% and comparison interest rate of 7.16%.
• NAB Base Rate Home loans, with minimum deposit of 5% and comparison rate of 6.99%.
• Commonwealth Bank Extra, with minimum deposit of 10% and comparison rate of 6.90%.
• ANZ Simplicity Plus, with minimum deposit of 10% and comparison rate of 7.24%.
• St George Bank Basic Promo, with minimum deposit of 5% and comparison rate of 6.70%.
• UBank Flex, with minimum deposit of 15% and comparison rate of 6.88%.
• Loans.com.au Basic Home loan, with minimum deposit of 10% and comparison rate of 6.06%

Not all lenders offer the government’s First Home Guarantee scheme. Those that do include major banks such as NAB and CBA as well as smaller lenders including Bank Australia, Bendigo Bank, Credit Union SA, IMB Bank, and Teachers Mutual Bank, among others.

The amount of deposit that a first home buyer needs will be determined by a number of factors including the location of the property, their income level, their access to a government scheme or loan guarantors, and the additional costs they are able and willing to pay.

All banks typically offer their best deals to buyers who have a deposit of 20% or more of the property’s value, or in other words, a low loan-to-value ratio (LVR).

If a home buyer’s deposit is less than 20%, banks will often impose additional conditions such as lenders mortgage insurance (LMI), which can add to the overall cost of the loan.

However, home buyers, particularly those looking for their first home, can still enter the property market without a 20% deposit.

“First time buyers rarely have 20% [of the price] tucked behind the sofa. It’s a lot of money by anyone’s standards,” Mortgage Choice’s Algar says. “It can be done with as little as 5%, but that’s where you really need to make sure you’re getting the right guidance.”

Alternatives include using government support such as the First Home Guarantee scheme, which enables eligible buyers to purchase a home within a certain price limit with a lower deposit, or using guarantor loans, where a close family member of a first home buyer can offer a guarantee against their property or assets.

If neither of these options are available, buyers can still shop around for better deals on LMI, because mortgage insurance costs can vary significantly between different lenders, which could help save thousands of dollars.

Fixed vs Variable: Deciding early on which type of home loan suits your needs and circumstances will make the process a lot easier. Fixed-rate loans provide more certainty but they offer less flexibility, while having a variable-rate home loan could mean the interest rate goes up or down. But this type of loan also generally offers more features such as offset or redraw accounts, which can reduce the borrowing cost in the long run.

Work out overall cost: First home buyers often focus only on the interest rate of the loan. While choosing a competitive interest rate is important, you should also consider additional costs such as various upfront or yearly fees, account charges, and insurance charges that can add to the overall cost of the loan. “It’s about understanding the total costs of the loan application. The true borrowing cost of a loan is not just the interest rate on the banner,” Algar says.

Research first homebuyer initiatives: The federal government and most states offer various types of concessions for first homebuyers. These include the First Home Guarantee scheme, the First Home Super Saver scheme that allows you to withdraw super contributions for home deposit, stamp duty waivers, and more. It is important to research and avail of all concessions you are eligible for, because doing so could save thousands of dollars over the life of the loan.

Shop around: It pays to shop around among the dozens of lenders in the market and compare the interest rates, features, and on potential mortgage insurance costs. “For most people, a home loan is the single largest investment or spend they will ever make and the worst thing you can do is just go and see your bank and hope that they will look after you,” Algar says. “Banks need to make a profit and they’re loyal to their shareholders, not to their clients.”

Consider using professional help: When you’re a first-time buyer, there are a number of moving parts to consider, including government schemes, stamp duty waivers, guarantors, the loan to value ratio, and mortgage insurance. Sometimes it can get a bit overwhelming. So using a professional such as a mortgage broker can provide support and make the process a lot easier.

Additional editing: Kevin Pratt