Best mortgages for first time buyers

By Mark Rosanes

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.

But having these benefits does not mean aspiring homeowners can dash headlong purchasing a property to their liking. Getting funding to acquire a home still requires sufficient planning and preparation.

Here are seven essential questions first home buyers (FHB) need to ask before taking that first step on the property ladder.

How much can first time buyers get?

Banks and other financial institutions often lend no more than 80% of the value of a residential property and up to 70% for a commercial property. 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 can help you calculate the amount you need to shell out for this one-time fee designed to protect lenders from financial loss.

But before they can borrow, aspiring homeowners need to qualify for a loan. Banks and other lenders typically conduct background checks to find out if a person is in a stable financial position to make repayments. They use different standards to determine an applicant’s borrowing capability.

Gainful employment is one of these benchmarks. Lenders often check a person’s annual income based on pay slips and tax statements from the previous two or three years. They also take into consideration daily expenses, medical bills, and debts, and debts. Lenders may look at the applicant’s number of dependents as well.

In some instances, banks will want to know if the borrower has genuine savings, and to some extent, retirement savings. They also check if a loan applicant has resources allotted for the deposit that are separate from their genuine savings.

A good credit history and an above average credit score can likewise help get an approval. Our borrowing power calculator can help provide an estimate of the amount you can afford to borrow based on your income and expenditure.

3 things to consider when deciding on a loan

FHBs can apply for a home loan directly to a bank or via an experienced mortgage broker. It also advisable that they do a thorough research on what type of mortgages are available to see which ones suit their financial situation.

Borrowers should also consider several factors when choosing the right home loan to apply for. These include:

1. Interest rates

Interest rates can be variable or fixed. 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. This means if cash rates increase, so will mortgage repayments. Similarly, if there are rate cuts, borrowers may end up paying a lower interest.

Fixed interest rates, on the other hand, allow borrowers to get locked in a certain rate for a certain period, enabling them to plan their future repayments without worrying about rate fluctuations.

2. Loan features

Mortgage features vary depending on the lender. Many of the country’s largest banks offer bundled financial services that suit different types of borrowers, including investors. Typically, borrowers should be looking for home loan features that allow them to vary repayments easily and access their balance online. 

3. Loan terms

Borrowers should also consider how long it will take them to pay off the loan and what happens to their mortgage if they make extra repayments.

What is the easiest mortgage to get?

The key to qualifying for a home loan is having a stable financial situation. Once eligible, FHBs can take advantage of several state-based grants and stamp duty discounts, significantly cutting the amount of cash needed to buy their dream properties. These include the HomeBuilder program, the First Home Owners Grant, and the First Home Loan Deposit scheme.

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 best 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 interest rates, loan features, and mortgage repayment terms.

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

Lender

Home loan

Interest rate

Loans.com.au

Smart Booster Home Loan

(1-year discounted variable rate, owner occupier, principal & interest, <80% LVR)

1.99% p.a.

(variable for 12 months and then 2.48% p.a.

variable)

Athena

Celebrate Variable Home Loan

(<60% LVR, owner occupier, principal & interest)

2.19% p.a.

(variable)

UBank

UHomeLoan - Discount Offer

(Owner occupier, principal & interest)

2.34% p.a.

(variable)

Suncorp

Fixed Home Loan Special Offer

(Owner occupier, principal & interest, <80% LVR)

1.89% p.a.

(fixed 2 years)

Virgin Money

Special Offer Reward Me Fixed Rate Home Loan

(Owner occupier, LVR <80%, 300K+)

2.04% p.a.

(fixed 3 years)

HSBC

Fixed Rate Home Loan

(Owner occupier, principal & interest, LVR <80%)

1.88% p.a.

(fixed 2 years)

Macquarie

Basic Home Loan

(Fixed, owner occupier, principal & interest, LVR 70-80%)

2.09% p.a.

(fixed 2 years)

ING

Mortgage Simplifier

(LVR<80%, owner occupier, principal & interest)

2.49% p.a.

(variable)

Well Home Loans

Well Balanced Fixed

(Owner occupier, principal & interest, LVR <80%)

1.94% p.a.

(fixed 1 year)

People’s Choice Credit Union

Fixed Rate Home Loan

(Owner occupier, principal & interest, home loan package)

1.99% p.a.

(fixed 4 years)

UBank

UHomeLoan

(Owner occupier, principal & interest)

1.95% p.a.

(fixed 3 years)

Newcastle Permanent

Special Real Deal Home Loan

(Owner occupier, principal & interest)

2.59% p.a.

(variable)

Suncorp

Back to Basics Special

(LVR<80%, owner occupier, principal & interest)

2.54% p.a.

(variable)

Well Home Loans

Well Balanced

(Owner occupier, principal & interest, LVR <80%)

2.17% p.a.

(variable)

Loans.com.au

Smart Home Loan 80

(Owner occupier, principal & interest)

2.48% p.a.

(variable)

HSBC

Fixed Rate Home Loan

(Owner occupier, principal & interest, LVR <80%)

2.09% p.a.

(fixed 2 years)

CUA

Achieve Variable Home Loan

(Owner occupier, principal & interest)

2.55% p.a.

(variable)

Athena

Variable Home Loan

(<80% LVR, owner occupier, interest only)

2.84% p.a.

(variable)

People’s Choice Credit Union

Basic Variable Home Loan

(LVR<80%, owner occupier, principal & interest, >$150k)

2.49% p.a.

(variable)

Yard

Variable Home Loan Special

(Owner occupier, principal & interest, LVR <70%)

2.09% p.a.

(variable)

Athena

Evaporate Variable Home Loan

(60-70% LVR, owner occupier, principal & interest)

2.24% p.a.

(variable)

Source: Mozo.com.au (10 December 2020)

 

What is the lowest credit score acceptable to get a loan?

An above average credit score plays a vital role in helping borrowers get an approval for a home loan. The table below shows the different credit score ranges, along the chances of qualifying for a loan.

Credit score

Chance of getting an approval

Excellent (833 to 1,200)

Easy approval with more loan options

Very good (726 to 832)

High chance of getting a home loan

Good (622 to 725)

Good chance of getting a home loan

Average (510 to 621)

Lenders will need to evaluate applicant’s financial situation

Below average (509 and below)

Low chance of getting a home loan, usually interest rates are very high if approve

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. Instead, most banks and lenders evaluate the score, along with several other factors, to find out who qualifies for what kind of home loan.

How much deposit do first time buyers need?

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.

How much money should I have saved for expenses?

Apart from the deposit, aspiring home buyers need to prepare for a slew of expenses associated with purchasing a property. Some of these costs involve one-off payments while others are ongoing expenses required for the maintenance of the home. Understanding what these costs are can help ensure the right decisions are made when buying a property.

One-off expenses

1. Loan establishment fees

Also called application fee, this covers the cost of documentation of a new mortgage. The fee can cost between $200 and $700 depending on the loan, although some banks and financial institutions are willing to waive this one-off payment.

2. Stamp duty

This covers the cost of changing the title and ownership of a property. Stamp duty is a state government-imposed tax, meaning the amount differs depending on the state where the property is located. The property’s value and purpose also determine how much stamp duty should be paid. Investment properties often have higher stamp duty costs than those intended as principal residence. You can get an estimate of how much you need to pay for a property using this stamp duty calculator.

3. Solicitor or conveyancing fees

This covers the legal transfer of the property’s ownership. The amount varies depending on the lender, but fees can start at $100 and, in some cases, exceed $1,000. Title transfer may also require search processing fees, which can cost about $50 per search.

4. Connections

These are fees covering utilities and services, including electricity, water, and gas, that need to be installed before the property is ready for occupancy.

Ongoing expenses

1. Loan repayments

The amount borrowed or principal, loan type, loan term, and interest rates often determine the cost of monthly mortgage repayments. Our mortgage repayment calculator can help provide an estimate.

2. Land tax

State governments, excluding Northern Territory, levy annual taxes to landowners. The cost varies depending on the state or territory and does not include properties erected on the land.

3. Council rates

Council rates are quarterly or annual fees collected by local governments for the proper maintenance of the council area, and cover garbage collection, plumbing, electrical, and other services. This form of property tax that also varies from state to state. The costs are often indexed against the property’s value and can reach thousands of dollars every year.

4. Body corporate fees

Body corporate fees, also called strata fees, are rates charged on properties located in a shared block such as apartments, townhouses, units, and flats. The fees pay for the maintenance of common areas and the management of the block. The cost depends on the condition, size, and location of the property, and can range between $50 and several hundred dollars per week.

5. Building and landlord insurance

Building and contents insurance provide cover to the property and its contents from unforeseen damage resulting from natural disasters such as fires and flooding. Landlord insurance protects property owners against loss or damage arising from tenancy issues, including theft, loss of rental income, and vandalism. These policies are not always required but it is advisable to have them. Annual premiums vary per state but typically ranges from $1,000 to $2,000. 

6. Repair and maintenance costs

Sometimes, repairing portions of a house is necessary to keep it in a habitable state. It is advisable to set aside a budget for costs and repairs.

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