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What type of home loan is best for a first home buyer?

What type of home loan is best for a first home buyer?

Because every first home buyer is in a different financial situation and has different personal goals, the best home loan option for each borrower will be different. Understanding some mortgage features and benefits that are popular with first home buyers can help you compare home loans and find a deal that best suits your needs.

Some of the home loan features that could help benefit first home buyers (and some other types of borrowers) include:

A low deposit

Saving up a deposit is often one of the most challenging aspects of applying for your first home loan. Many mortgage lenders prefer that a borrower pays 20% or more a property’s value upfront as a deposit, which can be a significant sum to save when you consider the high property prices in several Australian capital cities.

Some lenders will let you apply for a home loan with a smaller deposit of 10% or even 5% of the property’s value. This can help you spend less time and effort saving and buy your first home sooner.

But the smaller your deposit, the larger your loan, which could take longer and cost more to pay off in the long run. Additionally, if your deposit is smaller than 20%, your lender will likely take out a Lender’s Mortgage Insurance (LMI) policy to cover the risk of you defaulting on your repayments. LMI protects the lender, not the borrower, and most lenders pass the cost of LMI on for the borrower to pay – the smaller your deposit, the higher the upfront cost of LMI.

A guarantor

For more support with your property deposit, you may be able to ask a parent or similarly close family member to guarantee your loan with the value of their own property. This guarantee can partially or completely take the place of your deposit, allowing you to buy property sooner while minimising your upfront costs.

Of course, if you default on your mortgage repayments, your guarantor will become responsible for your loan, so it’s important that all parties involved are aware of the risks before making any agreements.

FHLDS mortgages

You may have heard of the First Home Owner’s Grants (FHOGs) that most state and territory governments offer to support first home buyers with their mortgage deposits. But the federal government also has a program to assist first home buyers – the First Home Loan Deposit Scheme.

This initiative allows first home buyers to purchase property with a deposit of just 5 per cent, and have the federal government guarantee the remaining 15 per cent required to avoid being charged LMI. With support from other concessions such as the FHOG, borrowers may be able to accelerate their buying journey.

To be eligible for the FHLDS, both the borrowers and the property they’re purchasing must fulfil eligibility criteria, and there are a limited number of places available in the scheme each financial year. Additionally, a limited number of mortgage lenders are participating in the scheme, so you may have fewer options to choose from when comparing mortgage offers.

Low rates

Everyone loves a low interest rate on their home loan. The challenge is often fulfilling the eligibility criteria to qualify for the lowest-rate deals. Borrowers often offer lower interest rates to borrowers who can pay larger deposits and who have higher incomes, which could put some of the lowest rate home loans out of reach of some first home buyers.

Some mortgage lenders offer special home loans for first home buyers with discounted interest rates. While these can appeal to some first home owners, keep in mind that these discounts are often temporary, and the loan may revert to a much higher rate once the “honeymoon” period is over.

Borrowers who are concerned that they may struggle to afford their loan if interest rates rise may choose to consider a fixed rate mortgage, which locks in the interest for a set period of time (typically 1 to 5 years). This keeps your repayments consistent for simpler budgeting, though you may not enjoy quite as much flexibility.

Low fees

Sometimes a home loan with a low interest rate and high fees can actually cost you more than a home loan with a higher rate and low or no fees at all. A quick way to get an indication of a home loan’s cost, including interest and fees, is to look at the comparison rate. This combines the cost of interest charges with the cost of standard fees, expressed as a percentage.

Keep in mind that the comparison rate is calculated using assumptions that may not accurately reflect your home loan, and should be used as a guideline only when comparing the costs of two or more mortgage deals.

Contact a broker

Confused about your first home loan? Even home owners who are refinancing or buying investment properties might need some help from a mortgage professional. Mortgage brokers are home loan experts who can walk you through every step of the journey, from assessing your finances to comparing loans to completing your application. Plus, their services are usually free, as most brokers are paid commission by lenders instead of charging fees to their clients.

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This article was reviewed by Personal Finance Editor Alex Ritchie before it was published as part of RateCity's Fact Check process.

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