As with many groups of home buyers, first home buyers need to consider more than just the advertised interest rate on their home loan. When deciding on a home loan that suits your circumstances, it is important to shop around and do some research beforehand.

Purchasing a house for the first time is an experience that can prove both thrilling and nerve-wracking. You want to make a confident and considered decision – but with such a wide array of home loan options for first home buyers out there, it is not always clear which to choose.

Before you even get started, you will need to determine whether you are actually eligible for a home loan in the first place. Another good idea is to pay off any large debts you might have, such as credit card debt, in order to maximise your borrowing power.

There are also many different kinds of home loan options to choose from. The best home loan for you will vary depending on your intentions with the property. If you plan on living in the property you are securing a loan for, then an owner-occupied loan is your best bet. Meanwhile, prospective investors might prefer an investment loan, which helps borrowers purchase a residential property with the intention of making a profit on it through their investment, rather than to live in.

Read more: Can you afford a home as a low-income earner?

1. Principal & interest vs interest-only

The pace at which you pay off the loan can differ. For instance, selecting a principal and interest loan means that when it is time to make a repayment, you pay a portion of the principal (the amount you originally borrowed) alongside the interest on that amount. In contrast, an interest-only loan will see you pay back only the interest for a set period – but be careful doing this, however, as your repayments will go up sharply once that period ends, and you start paying off the principal as well as interest.

Interest-only loans are typically more popular with investors as they can get tenants in, realise capital gain, and then hopefully later sell for a profit while keeping their mortgage payments low during that period. Lenders typically offer interest-free periods as long as five years, and renewable for a further five. However, check with your individual lender to confirm.

2. Fixed vs variable interest payments

Home loan rates might also be fixed or variable – or, sometimes, both. A fixed rate loan keeps your repayments at a set interest rate across the repayment period, whereas a variable rate changes depending on the current market rate, thereby affecting the value of your repayments. Another option is a partially fixed rate, which means a portion of your loan stays fixed at a set rate, with the remaining portion at a variable rate. In this case, you can typically decide what percentage at which you wish to split the loan.

The partially fixed rate means you could have access to a range of extra features, more than might be afforded to you with a completely fixed rate loan. These features include the ability to have an offset account, which reduces the amount of interest you have to pay by attaching an account for your salary to the home loan, and a redraw facility, which allows you to access extra repayments you have made to help with cash flow for other, non-home loan purchases. As always, you should weigh up your options to see whether having extra benefits suits your particular circumstances – because you might be able to save money on the loan by forgoing extra features.

3. Deposit requirements

Typically the maximum loan-to-value ratio (LVR) allowable is 95%, which means you need a deposit of at least 5%. This is unless you have a guarantor to come along with you for the ride, in which case you might be able to borrow 100% or even 110% of the property's value, depending on the lender.

In many cases, a 20% deposit or 80% LVR is the minimum required to not have to pay lenders mortgage insurance, or LMI. Contrary to popular belief, LMI is an insurance policy that covers the lender, not you, in case you default. However, some lenders offer cheap or no-cost LMI if you have a deposit of 15%.

Depending on the policy, the property's value, and the size of your deposit, LMI could add up to be thousands or even tens of thousands of dollars. It is also typically rolled into the mortgage, meaning you pay interest on the insurance policy, too. Higher interest rates also generally apply to higher-LVR home loans, not to mention the fact you're paying interest on a larger portion of the home's value.

  • LMI and other start up costs, plus any stamp duty payable, can quickly reduce the size of the deposit you thought you had.

First home buyers will have to weigh up getting into the market sooner with a smaller deposit, versus saving for a bit longer to save on LMI and get a more competitive interest rate but potentially miss out on the property they desire. In a hot market, prices can appreciate faster than first home buyers can save extra for a deposit. However, in a cooler market with falling property prices, a 20% deposit provides a bigger buffer and more equity.

4. Special first home buyer deals

Some lenders have specific loan products tailored to first home buyers. Benefits can include dropping the annual or monthly fees for the life of the loan, an interest rate discount, or less onerous deposit requirements. However, the caveat is usually that first home buyers sign up to a packaged home loan.

Packaged home loans, as you might have guessed, package up other features into the one product. This can include anything from an offset account, a credit card, insurance discounts, and other features. In return the first home buyer usually pays an annual package fee, typically around $400, but this can change. 

The benefit for the lender here is that you suddenly have all these products tied to one person. This makes it trickier to untangle yourself from these products if you want to refinance. There might also be extra fees if you discharge from a packaged home loan. The trade-off is it's very convenient, so you will have to decide what's best for you here.

First published June 2021, last updated by Harrison Astbury July 2022.