A guide to buying your first home
Estimated read time: 12 Minutes
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Saving for your deposit | First-home buyer fees | First-home owner’s grant | Finding and applying |
Buying your first property
From saving for a deposit, to navigating first-home owner grants, and comparing mortgages; our simple guide is here to help you get the keys to your first place.
Buying your first home can be thrilling. With it comes the freedom to paint and renovate as you’d like, a chance to escape that overbearing landlord you’ve been dealing with for years and the space to start a family. But there are a lot of things you should know as you set out on the path to becoming a first-home buyer. The property market can be a confusing – and competitive place. How much do you need to save for a first-home loan deposit? What are first-home owner’s grants? Do first home buyers pay stamp duty?
We’ve got you covered with this real-life guide to buying your first home, which could help take some of the stress out of one of the most exciting experiences of your life.
First things first. Consider your home loan deposit
The first, and for many, hardest, step in buying a property is saving a deposit. How much you need to save and how long that will take depends on several factors, including how much your home might cost, your income and your lifestyle.
Saving up tens, if not hundreds, of thousands of dollars can seem intimidating. That’s why one of the first things you could do is set a deposit target. To get an idea of how much you’ll need, research areas in which you want to buy. It could be a good idea to look at recent sale prices of homes that are similar to ones you have your eye on, and check out average year-on-year percentage price increases. This should give you a good idea of how much your first home could cost.
You might’ve heard that the recommended deposit amount to set your saving sights on is 20% of your new home’s cost. While that is a good target to set, it may not be the right move for you.
Saving the deposit for your first place can be daunting. Most lenders won't talk to you unless you've saved up at least 10% of the property price, plus the money to cover government and legal fees. Many lenders also keep their best home loan deals for those who have at least a 20% deposit.
With today's house prices, that's some serious money that you'll need to save. You'll hear loan to value ratio or LVR a lot when you're comparing home loans. Thankfully, it's easy to understand. It's just the amount you need to borrow compared to the price you're paying for your property. So the larger your deposit, the lower the LVR.
This will determine what lenders you can apply to, what interest rates you'll be eligible for, and what risk fees you might have to pay.
Risk fees, yeah, you heard that right. If you're applying for a loan with an LVR above 80 which means you've got less than a 20% deposit, you'll often need to pay Lender's Mortgage Insurance or a similar risk fee. These fees can range from a few thousand dollars to tens of thousands of dollars depending on the lender and your property price.
This protects the lender in case you default on the loan and they need to sell the property at a loss. While there isn't any direct benefit to the borrower, it does mean you can get on the property ladder with a smaller deposit.
As you save more towards a property, the LVR decreases and home loans usually become more competitive. Say hello to better interest rates and lower or even no risk fees.
So if you want to get the lowest interest rate possible and avoid paying LMI or a similar risk fee then you'll usually need to save up at least a 20% deposit and have an LVR of 80.
However, with house prices rising, waiting to save up that extra deposit may see you priced out of the market, so you might consider it worth paying the extra fees to get your foot in the door sooner. You'll also need to keep some cash aside to pay for your legal and settlement fees, not to mention the cost of furnishing your property. It's a lot to weigh up. If you need any more hints and tips for your home loan journey then visit peppermoney.com.au. We're here to help.
While there are positives to saving a 20% deposit, sometimes jumping in with a 10% deposit and paying LMI or a risk fee might be an alternative, as you could get on the property ladder sooner than waiting to save a 20% deposit. LMI or a risk fee is a one-off payment lenders may charge to protect themselves against the risk of not recovering the outstanding loan balance from a borrower who defaults on their loan. Learn more about LMI and other risk fees.
In the early stages of saving, make sure you do your research and ask lenders about their policy when a borrower has less than a 20% deposit – how much do they charge depending on house price and deposit amount? That can help you consider your savings target options.
Here are a few of the potential benefits and drawbacks for you to consider before deciding on how much to save up for your home loan deposit.
| Deposit Savings | Potential benefits | Possible drawbacks |
| 5% |
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| 10% |
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| 20% |
|
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Hints on how to start saving for your home loan deposit
Here are some things you may want to consider when looking to get your deposit savings on track:
A heads up on other first-home buyer’s fees
Your deposit isn’t the only thing you have to take into account as a first-home buyer. Regardless of how much you need to save for your deposit, you also need to factor in additional costs to finalise the purchase of your home, including the following:
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Conveyancing fees
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These cover the cost of transferring ownership of a house from seller to buyer and can range anywhere from $400 to $1,400 and as high as $2,200 across Australia’s capital cities1.
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Application fees
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Also called establishment fees, these are costs that some lenders charge for the application and settlement home loan process.
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Council and water rates
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You’ll need to ensure you’ve got enough to cover these.
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Strata fees
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If you’re buying an apartment or townhouse, then there will be a strata fee that you’ll need to pay, usually quarterly.
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Stamp duty
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This is a big one. Stamp duty is a fee that is charged by the government. It varies depending on the State or Territory and is a percentage of the purchase price of the property you are buying. That means the more expensive the home, the higher the stamp duty will be. However, most states and territories offer a stamp duty waiver or concessional grant for first-home buyers, depending on the purchase price and whether the property is a new build home. To get an idea of how much stamp duty you might have to pay, you can use each state or territory’s stamp duty calculator, click on the following links:
Get some help with a first-home owner’s grant
First-home owner grants (sometimes known as FHOG) can make a difference in helping you get over the line and assist to buy your first house.
So, what is a first-home owner’s grant?
A first-home owner’s grant offers financial assistance from the relevant state or territory government for those looking to buy their first home. The policies differ slightly for each state and territory.
For example, a First-Home Owner’s Grant in NSW offers up to $10,000 toward the purchase of your first place, as long as it’s an eligible brand new home that nobody else has lived in. Meanwhile the NSW First-Home Buyer Assistance Scheme can provide full or partial exemption of stamp duty charges – including full exemption on homes valued up to $800,000 and concessional rates on homes valued between $800,000-$1,000,000.
Meanwhile, the First-Home Owner’s Grant in QLD offers up to $30,000 towards buying or building an eligible, brand-new home. Grants and schemes like these can save you tens of thousands of dollars in up-front costs – and make getting into your dream home a reality sooner.
Finding – and applying for – the right home loan
Finding the right first-home loan for you is just as important as finding the right home. However, choosing the right loan can be about more than the interest rate.
Here are the things you may want to think about.
Fixed or variable interest rates?
Offset accounts or redraw facilities?
An offset account is an everyday transaction account linked to your mortgage. It might be worth thinking about keeping some of your savings in an offset account, because any money sitting in this account is offset against the amount owing on your home loan which can potentially reduce the balance of your loan and help pay it off faster.
For example, if you owe $650,000 on your home loan and have $30,000 in your offset, the interest charged will be on a loan balance of $620,000. However, offset accounts may come with monthly or annual fees and/or a higher home loan interest rate so you will need to consider whether an offset account makes sense for your own real life requirements.
Redraw facilities let you ‘access’ extra repayments you’ve made on your home loan above the minimum required repayments. For example, if you repay an extra $10,000 into your home loan, but then decide you actually need that money for something, you can access it. Most lenders offer free redraw facilities, but you usually have to be at least one month ahead in your payments, there may be redraw limits, and accessing the funds could take a few days.
Broker or applying direct to the lender?
Using a mortgage broker could be an idea for first-home buyers looking to take that initial step onto the property ladder. It’s important that you understand your home loan options – and be aware of the pros and cons. Just remember that doing your own research and making a decision on what loan is right for you is important even if you do go with a broker.
If you’re going direct, then you’ll need to compare lenders yourself to decide on who you’d like to apply with. This could add some extra legwork, however once you’ve applied, you could have direct contact with your loan application assessor, which could save time rather than dealing with the lender through a broker.
Choose your loan features
For more information on helping you find the right home loan for you, visit the Moneysmart website.
Other considerations for your mortgage application
Do a deep dive into your credit history
Your credit score and your credit rating plays a big role in determining success with your loan application in the eyes of a lender. While Pepper looks at much more than just this information, it is a piece of the puzzle that helps lenders determine who to offer credit to.
A credit score is a number put together by a credit reporting body or lender that summarises the information in your credit report and provides an indication of how likely you are to pay back the money you owe to a credit provider. It takes into account things like loan repayment history (including credit cards), the number and type of credit accounts you hold and the frequency that you’ve applied for credit. Credit reporting bodies or lenders use a complex algorithm to calculate a credit score, generally from 0 to 1000. While scoring will vary between credit reporting bodies and credit providers, the higher the score the better and anything above 700 is generally good. You can learn more about credit scores in our real-life guide to your credit report.
It’s important to obtain a copy of your credit report and review it regularly. You can request one free credit report every three months from each of the three main credit reporting bodies. Make sure personal details, including name, date of birth and address, are correct, and review your credit enquiries and repayment information to make sure it’s accurate.
Review your current debts
Having several loans or multiple lines of credit such as credit cards may impact your credit score and credit rating negatively. So, before you apply for your home loan, you may want to see if you can close credit cards you no longer use and lower the limits for others. Also try to consolidate or pay off as much outstanding debt as possible. If you have an outstanding university HELP balance, lenders will take this loan into account when assessing your loan application.
Genuine vs. non-genuine savings
Lenders will assess your savings, specifically if they are genuine or non-genuine. Genuine savings consist of money saved up over time – generally any savings you’ve held for at least three and sometimes up to six months. Non-genuine savings include money you’ve received, such as an inheritance or gift from a family member, a work bonus or capital gains from selling an asset. These may be considered genuine savings by a lender after being in your account for three months or longer.
While not true of all lenders, Pepper Money accept gifted, non-genuine savings for most of our loan products. Learn more in our guide: understanding the difference between genuine and non-genuine savings.
Employment
If possible, it’s a good idea to avoid changing careers or jobs when getting ready to apply for a home loan. Lenders generally like applicants who can show stability across not only credit history, but also employment, income levels and career paths. Starting a new business might mean inconsistent cash flow early on, which can raise red flags with lenders. And even if you’re not self-employed, lenders will often check that you’ve passed probation at a new job or see if you’ve had a sustained period of experience in the same industry when assessing your application.
What if you’re self-employed?
If you’re a sole trader or otherwise don’t have regular access to some of these records, there are self-employed home loans.
Other bits and pieces
Buying your first property at auctions
To give yourself the best shot of finding – and buying – your first dream home, you want to be prepared to confidently participate in auctions, as many sellers are choosing to sell their house by auction rather than private sale.
Auctions are one of the most popular ways to sell property in Australia and can be attended in-person, or online. With the drama of the bidding contest, it could be a good idea to ensure you're armed with an understanding of how they work and what you need to know before bidding.
As there is no cooling off period when buying under auction conditions, it's important to have unconditional approval on your loan application before you bid. This ensures you bid on a house within your budget and can negotiate with confidence. A pre-approved loan could still be declined if the house you end up buying doesn’t meet the lender’s guidelines or the valuation is lower than the purchase price, so unconditional approval will let you bid with confidence.
Auctions are subject to a range of rules and regulations that vary by state. Our quick guide outlines how property auctions work and what you need to know if you’re planning on making a bid.
Making an offer and negotiating
The time has come. Making an offer can be equal parts exhilarating and terrifying. So it’s important to keep your head and not lose sight of your goals – and perhaps most importantly, your budget. When you make an offer, you may want to slowly work toward the middle ground of what the seller wants and what you want to pay. It’s important to stay calm throughout the process and remember there is nothing wrong in walking away if something doesn’t feel right. Be prepared for your offers to be rejected, or for homes to sell for way more than you’re willing or able to spend. There will be other options out there, so don’t get disheartened.
What about co-ownership?
Co-owning a home with a friend or family member could be an option to get into the market if you don’t want to take on the financial burden of owning alone. But there are a few important things to think about.
You should obtain legal and financial advice from the start, regardless of who the co-owner is, how long you’ve known them and how close you are. These professionals can help you understand the pros and cons of co-ownership and help figure out the best buying structure for everybody involved, as well as the most suitable split ownership arrangement.
Sources:
1 Open Agent: Who’s the right agent for you? https://www.openagent.com.au/blog/how-much-conveyancer-cost
Contributor | Barry Saoud, General Manager, Mortgages and Commercial Lending
Barry joined Pepper Money in July 2021 as General Manager, Mortgages and Commercial Lending. He is responsible for the strategic direction and operating performance across product, credit, and settlements for mortgages, commercial loans, personal loans, and direct sales. Read more.
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