Buying your first home is as thrilling as it is daunting, largely due to the significant financial responsibility behind the decision.
But where are new home buyers supposed to begin when it comes to securing a loan?
Without the right guidance, the process can feel like a labyrinth.
To help you navigate this road, our specialists at The Mortgage Agency have crafted a comprehensive guide to answer the question, ‘How do first-home buyers obtain a loan in Australia?’ We will delve into the practical steps you’ll need to take, the hidden traps to avoid, and all the essential information you’ll need to make confident, well-informed decisions.
The Basics of a Home Loan
A home loan is a form of long-term financing provided by banks and other financial institutions. Alongside your house deposit, these additional funds allow you to finance the purchase of a property, with the home itself usually used as collateral.
Key elements include:
Minimum Deposit Required
Home deposits in Australia are your initial investment when buying your first home. They’re the initial lump sum payment you make towards the cost of your new property.
Generally, lenders state that the minimum deposit required is at least 20% of the value of the property. The larger your deposit, the smaller the loan you’d need to borrow and, as a result, the less interest you’ll end up paying.
Remember that if your deposit is less than 20% of the property’s value, you might be left paying lenders mortgage insurance (LMI).
Principal AmountÂ
The principal amount is the actual sum of money you borrow to purchase your home (the purchase price minus your house deposit). This part of the loan does not include the interest you’ll pay to the bank or financial institution.Â
InterestÂ
Interest is the cost you pay to borrow money. It’s essentially what the bank or financial institution charges for lending you the money, and you will have to shop around to find the right interest rates for your needs.
Loan TermÂ
The loan term is the agreed-upon period you will repay the loan. A typical home loan term is 30 years but can be shorter if wanted. Â
Home Loan Repayments
Repayment consists of both the principal amount and the accumulated interest. It could be paid in monthly instalments or as agreed upon with your lender.
For example, your repayments may be lower at the start, mainly covering interest, but as time goes on, they gradually shift towards paying off more of the principal.Â
Types of Home Loans Available
Various loan types are available to get you in your first home sooner, each offering particular features and benefits to cater to the array of unique financial needs of home buyers:
Fixed Rate Home LoansÂ
Fixed-rate home loans offer more stability and predictability, allowing you to lock in your interest rate for a fixed period. Doing this means your regular repayments remain constant regardless of external changes in the market interest rates, enabling you to budget with precision and confidence.Â
Variable Rate Home LoansÂ
Variable-rate home loans are a more flexible option where the interest rate is subject to change based on market fluctuations. While it might sound risky, it can work out cheaper if you must buy at a higher interest rate and need to lower your repayments when they decrease.
Construction Home LoansÂ
If you’re embarking on the exciting journey of building your first home rather than buying an existing one, a construction home loan might be your ideal choice. It provides a revolving line of credit to fund the stages of construction, offering you flexibility and control over your cash flow during this process.Â
Interest Only Home LoansÂ
Interest-only home loans only require you to pay the interest on your loan for a set period, generally between one and five years. Such an arrangement could reduce your initial repayments, affording you additional financial freedom in the early stages of homeownership.Â
Guarantor Home Loan
When applying for a home loan, eligibility depends on factors like credit score, income, debts, age, deposit amount, and the loan amount. If you cannot meet criteria like deposit requirements, a guarantor loan is an option, where a close family member offers their property as security without transferring cash, using their home equity to support your deposit.
Step-By-Step Guide to Your First Home Loan
You’ve done your research; you’ve studied, compared and weighed your options. Now, it’s time to get into the meat of the matter—applying for your first home loan.
Here’s a step-by-step guide to walk you through the process:Â
Step 1: Self-AssessmentÂ
Start by taking a long look at your financial health — your income, savings, debt and credit score.
Lenders consider these factors in their eligibility criteria, but it will also help you to determine how much you can comfortably borrow without straining your budget.Â
Step 2: Partner with a Mortgage Broker or Specialist
Embarking on the journey to secure a home loan is made all the easier when consulting a professional in the industry.
Consider reaching out to a local home loan advisor, such as The Mortgage Agency, who has extensive experience, are aware of available home owners grant options, and are well-equipped to guide you through the buying process.
Step 3: Home Loan Pre-ApprovalÂ
Before you start house hunting, consider seeking pre-approval for your preferred home loan. A lender will evaluate your finances to determine how much they are willing to lend you, saving you precious time when making an offer on a competitive property.
- For a productive consultation, it’s beneficial to bring essential documents that paint a clear picture of your financial status. These include:
- Current bank statements, paychecks, and other documents to validate your income and expenditure.
- Information about your current assets and debts, such as investments, credit card balances, and loan obligations.
- A breakdown of your regular household and living costs.
- Identification documents, including your birth certificate, driving license, passport, or citizenship papers.
While being pre-approved is not a certainty, it gives a good indication of your borrowing power and confidence in your home search.Â
Step 4: Securing the Home LoanÂ
Once you’ve found a home within your set property value limit, you’ll finalise your home loan application with your chosen lender. They’ll review your financial situation once more plus evaluate the home you’re buying.
If everything checks out, you’ll receive formal, unconditional loan approval. Your lender will send a loan contract for you to sign. Â
Step 6: SettlementÂ
The settlement date, arranged between your conveyancer or solicitor and the seller’s legal representative, usually falls between 30 and 90 days after the Contract of Sale is signed. This timeframe, however, can vary depending on the state.
The First Home Owner Grant & Other Assistance Options Available
If you’re a first-home buyer and permanent resident, you’ll be relieved to know there are several government schemes and initiatives on offer to lend a helping hand.
These include:
The First Home Owners Grant
Introduced on July 1, 2000, the First Home Owner Grant (FHOG) was established to counterbalance the impact of the GST and stamp duty on acquiring homes. The states and territories finance this nationwide initiative, each managing it according to their own laws, meaning benefits will vary from the Australian Capital Territory to South Australia to Victoria.
For example, NSW first-home-owner grants provide $10,000 when you build or buy your first home (be it a house, townhouse, apartment, or unit), as long as the purchase price doesn’t exceed $600,000.
First Home Guarantee
The First Home Buyer Guarantee (FHBG) allows qualifying purchasers to secure a home loan from an approved lender with Housing Australia’s backing. The guarantee lets eligible buyers purchase a home with a minimum 5% deposit, exempting them from Lenders’ Mortgage Insurance costs.
In this scheme, Housing Australia guarantees up to 15% of the property’s value as appraised by the lender. It’s important to note that this guarantee isn’t a cash payment or a deposit contribution for the loan. Specific eligibility requirements must be met to qualify.
There are 35,000 FHBG slots available for eligible home buyers from July 1, 2023, to June 30, 2024.Â
Family Home Guarantee
The Family Home Guarantee (FHG), under the Home Guarantee Scheme by the Australian Government and also administered by Housing Australia, assists eligible single parents or legal guardians with dependents in purchasing a home. This support extends to first-time buyers and those who have owned a home.
From July 1, 2023, to June 30, 2024, there are 5,000 FHG opportunities available.
The FHG allows qualifying individuals to secure a home loan with a minimal 2% deposit through participating lenders, backed by Housing Australia’s guarantee.Â
So, this guarantee eliminates the need for Lenders’ Mortgage Insurance. This guarantee covers up to 18% of the property’s assessed value by the lender but does not constitute a cash contribution or deposit for the loan.
Tips to Boost Your Chances of Securing a Home Loan
Eligible first home buyers in Australia have several options available to them to maximise their chances of receiving approval for that all-important home loan.
Here are some actionable tips that will surely help you on your path:
Work on maintaining a strong credit score
Give banks a clear indication of your financial health and history. Paying your debts on time and staying in control of credit card use can foster a positive credit history, which is a key part of your lending criteria.
Have a stable income and employment history
Lenders value consistency in a potential home buyer. If you can show a steady income and job history, this can significantly improve your chances of securing a loan.
Save for a larger deposit
Saving a significant deposit shows your lender that you’re disciplined in managing your money. Greater deposits usually translate to lesser risk for your lender, making them more likely to approve your application.
Minimise other debts
Having fewer debts indicates you have more surplus income that you can dedicate to repayments, making you an appealing candidate for a loan.
Key Takeaways
- Understanding the basics of a home loan – including the principal, interest, loan term, and repayments – is essential for first-home buyers.
- Several home loan types are available to an owner-occupier, including fixed rate, variable rate, construction, and interest-only loans. Choose the one that best suits your financial situation.
- Effective preparation is key. Before the loan can be secured, take the time to conduct a self-assessment, secure pre-approval, and go through a thorough hunting house process.
- Australian first-home buyers have specific guidelines to follow as part of the home-buying process. Knowledge of these guidelines can assist in the loan acquisition process and get you on the property ladder sooner.
- Proper planning and certain strategies can significantly boost your chances of securing a home loan. These include enhancing your credit score, managing debt, and building sufficient savings.
- The Australian government provides various forms of assistance to first-time home buyers, including, grants, schemes, stamp duty concessions and more to minimise upfront costs.
- Eligibility for first-time home buyers seeking a loan in Australia varies based on age, available spots, and whether you are an Australian citizen.
Receive Personalised Support as a First-Time Home Buyer
Ready to get into your own home?
Contact The Mortgage Agency as you take the first steps to becoming a home buyer.
