Best mortgages for first time buyers

One of the greatest obstacles hindering many Australians’ path to homeownership is the heavy financing involved. Recently, however, a string of housing incentives, including government-sponsored grants and the central bank’s historic-low interest rates, has created an environment that is ripe for first-time buyers to secure their dream homes.

However, these benefits don’t mean that aspiring homeowners can immediately purchase the property of their dreams. You need to plan well before you can get funding.

Here are seven important questions first homebuyers (FHB) must ask before making that first move on the property ladder.

What is the maximum amount first-time buyers can get?

Banks and other financial institutions rarely lend more than 80% of the residential property’s value and as much as 70% for commercial properties. But there are situations when they are willing to grant loans as much as 95% or even 100% of the property’s value.

For loans going beyond these standard values, a lender’s mortgage insurance (LMI) is often necessary. Our LMI estimator helps you to calculate how much you will need to pay for this one-time fee to protect lenders against financial loss.

Before they can borrow money, potential homeowners must be approved for a loan. Lenders and banks often conduct background checks to see if an applicant is in a financial position to pay back the loan. They use different standards to determine an applicant’s borrowing capability.

This benchmark includes gainful employment. Lenders often check a person’s annual income based on pay slips and tax statements from the previous two or three years. They take into account daily expenses, medical costs, and debts. Lenders may look at the applicant’s number of dependents as well.

Banks will sometimes want to see if a borrower has any savings or retirement savings. Banks will also want to know if the loan applicant has any resources that they have set aside for the deposit, apart from their real savings.

An approval can also be obtained with a good credit history and a high credit score. The borrowing power calculator allows you to estimate the amount that you can borrow based upon your income and expenditure.

There are 3 things you should consider before you decide on a loan.

FHBs can apply directly to a bank for a mortgage or through an experienced broker. FHBs should do extensive research about the different types of mortgages available in order to find which one is best for them.

When choosing the right loan for their home, borrowers should consider many factors. These are:

1. Rates of interest

Variable or fixed interest rates are possible. Many banks and lenders offer variable home loan interest rates, which fluctuates over time often in line with the Reserve Bank of Australia’s (RBA) cash rate. Mortgage repayments will increase if cash rates rise. In the same way, borrowers might end up paying lower interest if rate increases occur.

Fixed interest rates allow borrowers to lock in a rate for a specific period of time, which allows them to plan their future payments without worrying about rate fluctuations.

2. Features of a loan

The lender can vary the features of a mortgage. Many of the country’s largest banks offer bundled financial services that suit different types of borrowers, including investors. Borrowers should seek out home loan features that allow for easy repayment adjustments and online access to their balance. 

3. Lender terms

Borrowers need to consider the time it will take to repay the loan as well as what happens to their mortgage if additional repayments are made.

What is the best mortgage?

Stable financial circumstances are key to qualifying for a loan. FHBs who are eligible can receive a variety of state-based grants as well stamp duty discounts. This will significantly lower the amount required to purchase their dream homes. These include the HomeBuilder program and the First Home Owners Grant.

Borrowers can also benefit from the RBA’s record-low interest rate of 0.1%, which the central bank indicated would stay at that level for at least the next few years, giving potential home buyers a sense of certainty.

Which bank is the best choice for first-time borrowers

Home loans vary from bank to bank, and often the best way to determine which ones fit a borrower’s financial situation is by comparing first home buyer loans and their interest rates, loan features, and mortgage repayment terms.

Mozo.com.au recently listed some of the best lenders for home loans, including banks. These figures are based on the online comparison site’s 10 December data.

What is the acceptable credit score for getting a loan?

A high credit score is crucial in helping borrowers obtain approval for a loan. Below is a table showing the credit score ranges and the chance of getting a loan.

Most Australian lenders use an automated system, called Equifax, to calculate a person’s credit rating, but do not rely solely on the score to determine whether a borrower is high-risk or not. Most banks and lenders use the score along with other factors to determine who is eligible for which type of home loan.

What deposit is required for first-time buyers?

Most lenders in Australia require borrowers to make a deposit equal to 20% of the property’s price to be able to secure a home loan without having to pay LMI. Borrowers can also apply for a loan with a lower amount, but having bigger deposit often indicates that they can manage their finances well, minimising the lender’s risks and increasing their chances of getting a home loan approved.

What amount should I save for expenses?

Aside from the deposit, potential home buyers should prepare for a host of costs associated with buying a property. While some of these expenses are one-off, others require ongoing costs to maintain the property. Knowing what these costs entail can help ensure that the right decisions are made before purchasing a property.

Only one-time expenses

1. Loan establishment fees

This is also known as an application fee. It covers the cost to document a new mortgage. The fee can range from $200 to $700, depending on the loan. However some banks or financial institutions will waive this one time payment.

2. Stamp duty

This includes the cost to change the title or ownership of a property. Stamp duty, which is a tax levied by state governments, is different depending on the location of the property. The property’s value and purpose also determine how much stamp duty should be paid. Stamp duty costs for investment properties are often higher than those for principal residences. This stamp duty calculator will give you an estimate of the cost to purchase a property.

3. Conveyancing or solicitor fees

This covers the legal transfer of the property’s ownership. The fees vary depending on the lender. However, they can start at $100 and sometimes exceed $1,000. You may need to pay search processing fees for title transfer, which can be as high as $50 per search.

4. Connections

These fees cover utilities and services such as electricity, water, or gas. They must be paid before the property can be occupied.

Permanent expenses

1. Repayments for loans

The cost of monthly mortgage repayments is often determined by how much you borrowed or the principal amount, loan type, length, interest rate, and loan term. Our mortgage repayment calculator can help provide an estimate.

2. Land tax

The annual tax levied by state governments on landowners is not applicable to the Northern Territory. The cost depends on the territory or state, and does NOT include property erected on the land.

3. Council rates

Council rates are either quarterly, or annual fees that local governments collect to maintain their council area. They include garbage collection, plumbing, electricity, and other services. This property tax is also subject to variations from state-to-state. The costs are often indexed against the property’s value and can reach thousands of dollars every year.

4. Fees for body corporate

Body corporate fees are also known as strata charges and are charged to properties that are located in a common block. These include apartments, townhouses or units. These fees cover the maintenance and management of the block. Costs vary depending on the condition of the property and the location. They can be between $50 to several hundred dollars per semaine.

5. Landlord and building insurance

The contents and building insurance protects the contents and property from damage that may be caused by natural disasters like fires or flooding. Landlords insurance protects property owners from damage or loss due to tenancy issues like theft, loss of rental income, vandalism, etc. While these policies may not be required every year, they are recommended. Although annual premiums can vary by state, they are typically between $1,000 and $2,000. 

6. Repair and maintenance expenses

It is sometimes necessary to repair or replace parts of a home in order to maintain its habitability. It is recommended to budget for repairs and costs.