Buying your first home is an exciting milestone in so many ways. However, navigating the complex world of home financing may also make securing your first property a little overwhelming..
With various mortgage options to weigh up, first home government incentives to consider and a myriad of tasks to work through – not to mention a challenging housing market to navigate1 – there’s a lot to get to grips with.
“Accessing the housing market has been difficult for first home buyers for a long time because property prices have generally risen faster than wages,” says Elizabeth Owen, Head of Residential Research Australia at CoreLogic.
“More recently, there have also been additional pressures, including a rapid increase in interest rates and rental costs, making it harder to save for a deposit.”
With all that in mind, let’s look at the key steps involved in getting a first home buyer loan, as well as some of the other practicalities such as choosing home insurance and knowing what to expect on settlement day.
Understanding the home buying process
Having a clear grasp of the steps involved in buying a home – including getting a first home buyer loan – may help first-time buyers feel more in control on the road to home ownership, says Sally Tindall, Data Insights Director at Canstar.
“The better you understand the process before you start, the more confident you will be in making important decisions along the way, and (in) questioning rates and fees you might be presented with,” says Tindall.
The process may vary depending on your circumstances but, generally, it will look something like this:
- Setting a budget – the amount you can borrow depends on factors such as your income and financial commitments, the size of your deposit, and your credit score.2
- Applying for first home buyer incentives – government schemes targeted at first home buyers include the First Home Owner Grant, the Regional First Home Buyer Guarantee and the First Home Super Saver Scheme.3
- Finding a suitable home loan – comparing mortgage products based on factors such as interest rates, fees, repayment types, loan features and terms is the key to choosing an appropriate loan.4
- Considering a pre-approved loan – pre-approved finance gives borrowers an indication of their borrowing capacity.2
- Making an offer – prospective buyers make an offer on a property through private treaty or by bidding at auction.2
- Engaging a solicitor or conveyancer – a conveyancer can review the contract, complete all legal paperwork, organise the stamp duty transaction and finalise settlement with the lender and seller.5
- Paying the deposit – once an offer or a bid is accepted, the successful buyer signs the contract of sale and pays the deposit.6
- Preparing the loan application – the borrower finalises loan details with the lender.2
- Settlement – All legal paperwork is completed, and payment finalised prior to the buyer taking ownership of their new home.2
Setting a budget
When buying your first home, establishing what you can realistically afford to borrow will give you an indication of the property price range to consider.7
“Understanding your borrowing capacity as a first step can save you a lot of time and potentially heartache,” says Owen.
This may entail scrutinising your finances, including your income and monthly expenses – such as utilities, groceries, schooling, leisure and transportation – and considering any existing debts, including credit cards or car and student loans.8
Other costs that can impact your budget include:9
- legal fees
- bank fees
- stamp duty
- maintenance and repairs
- home insurance
- lenders mortgage insurance (LMI), which may apply if the deposit is less than 20% of the property value.9
Borrowers who are eligible for the federal government’s First Home Guarantee may be able to buy a home with as little as 5% deposit without paying LMI.10
Online mortgage calculators, such as this one on the federal government’s Moneysmart site, can also be a helpful tool to indicate borrowing limits and what monthly repayments could look like.11
What is a home loan pre-approval?
Some would-be first home buyers seek out a pre-approved loan from a lender before embarking on their search – also referred to as a conditional approval.
A pre-approved loan shows that a prospective buyer is eligible to apply for a loan up to a certain amount. While non-binding, pre-approved finance also helps you set a realistic price range and shows sellers that you’re serious about buying.2
Lenders may require evidence of a borrower’s current financial situation, including any ongoing debts, in order to assess their capacity to repay the loan.2
The borrower’s credit score will generally also be factored into the equation.12
Tip: You can check your credit score for free via a number of credit reporting bodies – see the Office of the Australian Information Commissioner for links.13
It’s important to note that pre-approved loans are only valid for three to six months and may be subject to change as your circumstances or the lending climate changes.2
What documents do you need for a pre-approved loan?
Some of the documents first home buyers are routinely required to supply for a home loan pre-approval are:12
- primary photographic identification – for example, an Australian passport or driver’s licence
- secondary identification – for example, a recent ATO notice or utilities notice showing your name and residential address
- copies of your most recent payslips and Group Certificate or, if self-employed, your ATO assessments for the past two or more years
- other income documents – for example, share dividends or Family Tax Benefits statements
- recent bank statements charting your savings and expenses.12
It may save time to scan these documents and save them to a folder, ready for when you make your loan application.9
How to apply for a first home buyer loan
When it comes to applying for a first home buyer loan, some buyers engage a mortgage broker to act as a go-between with banks and lenders and identify the best loan option for their situation.9
“Working with a mortgage broker can be a really vital step for first-time buyers and those who are not as confident with concepts in finance and economics, because it can be such a confusing landscape,” says Owen.
Choosing the right home loan
With so many lenders out there vying for first home buyers’ business and so many home loan options to consider, it may be difficult to decide which product is right for you. Moneysmart recommends comparing loans from at least two different lenders; and keeping in mind that home loans with multiple options or features – such as offset accounts, redraw or line of credit facilities – may come at a higher cost.4
According to Moneysmart, these features may offer flexibility or the ability to pay off your loan faster, and most are ways of putting extra money into your loan to reduce the amount of interest you pay. However, some could cost you more, so it’s important to weigh up all your options – and even seeking professional help if you’re unsure.
What are the different types of home loans?
Prospective borrowers can generally choose between three main types of home loans:4
- fixed interest rate – interest rate remains fixed for a set period
- variable interest rate – interest rate can fluctuate as the official cash rate changes
- partially-fixed rate – loan is split between fixed and variable portions.4
When comparing options, remember that a home loan is a long-term debt so even a 0.5% interest rate difference could amount to thousands of dollars over time.4
Additionally, home loan payments typically fall under two distinct categories:4
- principal and interest – regular payments reduce the amount borrowed (the principal), plus cover interest
- interest only – repayments only cover interest on the principal amount for an initial period during which debt is not reduced.4
Can you refinance a first home buyer loan?
Yes, it is possible to refinance your first home buyer loan if you find better interest rates or more favourable terms later on. Home loan refinancing entails replacing your current home loan with a new mortgage from a different lender.14
Ideally, the savings of refinancing should outweigh the expenses involved so it’s prudent to consider any associated fees – such as break or transfer fees – before making this decision.14
“If you’ve opted for a variable rate, haggle with your bank at least once a year to make sure it remains competitive,” suggests Tindall. “If you’re on a fixed rate, diarise the end date and start looking at your options at least two months out.”
Explore government grants and incentives
Saving up for a home deposit can seem daunting, but there are several government grants and schemes available to eligible first home buyers to help make home ownership that little bit easier. Here’s a brief outline of some incentives you may be entitled to:
First Home Buyer’s Grant
A national scheme, the First Home Owner Grant aims to offset the effect of the GST on buying or building a first home.15 Each state and territory has its own eligibility criteria and benefits.16
First Home Super Saver Scheme
The federal government’s First Home Super Saver Scheme allows first home buyers to make voluntary contributions to their superannuation, which can later be withdrawn and put towards a home deposit.17
Regional First Home Buyer Guarantee
The Regional First Home Buyer Guarantee supports home buyers in regional Australia. It supports eligible buyers to purchase a property with a deposit as low as 5%, without needing to pay LMI.18
Stamp duty concessions for first home buyers
All states and territories offer concessions or a stamp duty exemption for first home purchases below a certain value threshold. Stamp duty is a one-off state government property-transfer tax, typically paid within 30 days of settlement.2
Housing Australia has a useful online tool that can help indicate your eligibility for the First Home Guarantee scheme or Regional First Home Buyer Guarantee.19
Settlement
The big day! On the settlement date, the property title is transferred into your name and you’re required to pay the full purchase price. This is when your mortgage begins.2
Helpful resources for first home buyers
Here are some sites first-time home buyers may find useful:
- Moneysmart – a federal government site that provides financial tools, tips and guidance, including information on budgeting, loans and financial management20
- CoreLogic – market insights and property data to inform smarter buying decisions21
- Housing Australia – learn about available government support to buy a home.22
First home buyers can also access localised information on home buying in their own state or territory here:
- Australian Capital Territory
- New South Wales
- Northern Territory
- Queensland
- South Australia
- Tasmania
- Victoria
- Western Australia
Considering your insurance options
Once your dream of home ownership becomes a reality, you might wonder how best to cover your precious new asset against certain types of damage or loss. In some cases, taking out a home insurance policy may be a condition of a home loan.2
Youi has home insurance options that are designed to be a bit more you-shaped, including Buildings and Contents insurance and Contents insurance. When the timing is right, consider starting a quote with Youi.
Information in this article is correct as of November 2024 and by its nature may change over time. Check relevant government websites for updates if this information is important to you.
1 Source: SBS News – ‘Critical issue’: Record low housing affordability — and the Australians all but locked out, September 2024
2 Source: Moneysmart – Buying a house
3 Source: realestate.com.au – Every first-home buyer scheme explained
4 Source: Moneysmart – Choosing a home loan
5 Source: NSW Government Fair Trading – Conveyancing
6 Source: NSW Government Fair Trading – Contracts and deposits
7 Source: NSW Government – Planning your finances
8 Source: Moneysmart – How to do a budget
9 Source: CoreLogic – How to get ready for your first home loan
10 Source: Housing Australia – First Home Guarantee
11 Source: Moneysmart – Mortgage calculator
12 Source: Canstar – What documents do I need for a pre-approved mortgage?, April 2024
13 Source: Office of the Australian Information Commissioner – Access your credit report
14 Source: Canstar – How soon can you refinance a mortgage?, January 2023
15 Source: Moneysmart – First Home Owners Grant
16 Source: Australian Government – First Home Owner Grant
17 Source: Australian Government – First Home Super Saver Scheme
18 Source: Housing Australia – Regional First Home Buyer Guarantee
19 Source: Housing Australia – Eligibility Tool
20 Source: Australian Government – Moneysmart
21 Source: CoreLogic – Unlocking smarter property decisions
22 Source: Housing Australia – Support to buy a home
