These features will help you pay your loan off quicker
At the very essence, first home buyers should seek the lowest cost that suits their needs and that they're eligible for. These are some considerations first home buyers should be aware of before making the plunge.
Home loans can range from basic repayments to fully featured loans. At this stage of the process, it requires you to muster a great deal of foresight and maturity.
To set expectations to begin with, it is possible to be stuck with a home loan for a fair while if you've used Lenders Mortgage Insurance.
Say, for this example, that there is no capital growth on the property. With a $30,000 deposit for a $450,000 property, it would take 5 years and 11 months to pay off enough equity to dip below a 80% LVR. An LVR of below 80% is required before switching to another loan product is possible without paying LMI in full again.
So it's very important that the first loan product used is a competitive one, as first home buyers could be stuck with it for some 6 years before the opportunity to refinance arrives. This would be a very long time to be stuck with a product with a high interest rate. Features such as offset accounts can help homebuyers save interest.
|100% offset account||An offset account is a transaction account linked to your home loan whereby the balance offsets the interest payable. The balance is deducted from the remaining principal when calculating interest.|
|Redraw||A redraw facility is the ability to withdraw the additional mortgage repayments you've made over the course of the loan. Some providers have minimum amounts that can be withdrawn and fees for redrawing.|
An offset account could save borrowers thousands of dollars in interest and years over the life of the loan. To project how much interest you could save with an offset account, use our offset calculator.
How much do you need to save?
A rule of thumb is to save at least 10% of the property value. This can give a 5% buffer (for a maximum 95% LVR loan) to pay add costs such as stamp duty and LMI onto the principal of the loan.
Both stamp duty and LMI costs could be as high as 8% of the property value. So it is worth realising that the purchase price of a property isn't the only whomping expense in property buying. Although, not all states have stamp duty and not all apply stamp duty to first home buyers. For stamp duty charges in your state, view our stamp duty guide.
A 20% deposit or more is required to avoid paying LMI. LMI could cost as much as 3% of the value of a property, so saving a large deposit is a good way to keep your upfront costs down.
The other way to avoid paying LMI is to have get a guarantor loan
What is a guarantor home loan?
A guarantor home loan is when a parent guarantees you won't default on your home loan by signing a security guarantee against their home. Usually a guarantor's liability is limited to around $50,000, but this will be specified in the contract. Borrowers still have to prove a history of genuine savings and pass the loan serviceability tests — which inputs borrower's salaries, expenses and other financial details into a model before approval can be given.
Using a guarantor loan could limit your choice of home loan providers and home loan features.
Don't wreck your credit score
Ensure that there is a high likelihood that you'll qualify for a home loan before you apply. The way the credit system works, each application for credit is recorded against your name. Multiple entries in a short space will more than likely lead to rejection. Play it safe, only apply for one at a time, otherwise it may be six months or longer before lenders will accept an application again.
Latest first home buyer products:
Start your home loan comparison by browsing the products below. They will help you get a snapshot of what is available to you as a first home buyer.
What is the difference between interest rate and comparison rate?
An interest rate is the rate that determines how much interest you pay and determines how much interest you'll pay on your loan. A comparison rate is the interest rate plus typical administration fees and ongoing charges. A standard comparison is calculated based on the life of a 25 year home loan and a principal of $150,000.
Home loan glossary
When researching your first home loan you may come across some of these terms below.
|Principal||This is the total amount you've borrowed from a lender|
|Interest||Interest is the cost of borrowing, paid to the lender as a percentage of the loan principal per year.|
|Loan term||This refers to the length of time the borrower has to repay the loan|
|Repayment frequency||How often you'll be paying off your loan. Either weekly, fortnightly or monthly.|
|Loan-to-Value Ratio (LVR)||An LVR = (loan amount ÷ property value) x 100. This gives a figure of the loan as percentage of the properties value. Calculating an LVR before attempting to purchase, will help determine the minimum deposit is required.|
|Lenders Mortgage Insurance (LMI)||LMI is the upfront premium that is payable when borrowers have an LVR of 80% or more. This covers the borrower in the event of your default.|
At the very essence, first home buyers should find the lowest cost that suits their needs and that they're eligible for. Comparing products is the most important thing to do at this stage because the decision will stay with you and your home.