Buying a home for the first time is one of the biggest decisions you’ll ever make – and that can come with its fair share of stress. Making sense of everything you need to know – from budgeting and putting down a deposit to finding the right home and settling the contract – is no easy undertaking, especially if you’re new to the whole process.
To make life easier, we’ve put together this comprehensive guide to saving for, finding and securing your dream home.
How to budget for buying your first home
Before you start seriously looking at properties, you’ll need to have a budget in mind for your first home and have saved enough to put down a deposit. Depending on your financial situation and budget, saving for a home could take months or years, so it’s a good idea to start planning as soon as possible. Here are some of the key things to consider when budgeting for a first home.
How much should you borrow for a mortgage?
Before applying for a mortgage, it’s important to consider whether you can afford the monthly repayments over a 25- or 30-year period. Mortgage providers will look at your income and outgoings to see if you can keep up with repayments if interest rates rise or your circumstances change.
Borrowing the maximum amount available to you from a mortgage lender can help put you on the home ownership map quicker, but it isn’t necessarily the best decision. Keep in mind that the less you borrow, the less your repayments will be and the less interest you’ll have to pay over the lifetime of the loan.
How much do you need for a deposit when buying your first home?
The amount you’ll need to save for a deposit when buying your first home depends on your price range for properties and what percentage of the total value you want to put down as a deposit. Generally, you need to try to save at least 5% to 20% of the cost of the home. Tighter lending restrictions recently introduced by the Australian Prudential Regulation Authority (APRA) mean that fewer lenders are approving home loans without a deposit of at least 20% - so aiming to save a 20% deposit is a good rule of thumb.
Typically, if you borrow more than 80% of the home’s value (i.e. put down a deposit less than 20%), you’ll also need to pay Lender’s Mortgage Insurance, which is an added cost to consider.
How to save for a house deposit
Saving for a house deposit is a long-term process for many first home buyers. With that in mind, you should:
- Prepare a budget and stick to it: Define your savings goals and figure out how much you need to save monthly to reach that goal within your ideal timeframe. MoneySmart’s free budget planner or apps like Goodbudget are useful for tracking your spending and progress.
- Open a separate bank account: Open a dedicated high-interest savings account or term deposit account and set up automatic transfers into it at regular intervals.
- Pay off existing debts: Aim to pay off credit cards, personal loans and other debts to increasing your borrowing power.
- Analyse your spending ongoingly: Look for opportunities to save more and cut out unnecessary expenses.
What are the hidden costs of buying a house?
With a home deposit at the front of your mind, it’s easy to overlook the other costs associated with buying a home. Here’s an example of extra costs you could potentially have to pay on a $400,000 property:
|One-off government fees|
|Tranfer registration fee||$90|
|Stamp duty on property purchase||$16,719|
|One-off home financing fees|
|Loan establishment fee||$600|
|Settlement attendance fee||$100|
|Lenders' Mortgage Insurance arrangement fee||$20|
|Lenders Mortaage Insurance (LMI)||$5,328|
|Rate lock fee||$395|
|One-off property costs|
|Valuation of property||$200|
|Conveyance fee (or solicitor)||$1,000|
|Research and property advice||$6,000|
|Building inspection report||$300|
|Pest inspection report||$200|
|Connecting telephone and internet||$100|
What grants do first home buyers get?
Most states and territories in Australia offer a grant for first home buyers and/or stamp duty discounts for people buying their first homes. The exact amounts and conditions differ from state to state, so it’s best to check your state government’s website for specific details.
The eligibility criteria for first home buyer grants and discounts also differs from state to state, but generally includes the following:
- You must be a first home buyer
- At least one applicant must be a permanent resident or Australian citizen
- Each applicant must be at least 18 years old
- You or your spouse, partner or co-purchaser must not have previously owned an interest in land in Australia which had a residence on it, before 1 July 2000
- You or your spouse or partner cannot have lived in a residential property which you owned from 1 July 2000
- You or your spouse, partner or co-purchaser may not have claimed the grant previously
- Your first home must be your principal place of residence within 12 months of the construction or purchase of your home with a minimum 12-month period of occupancy
What is the First Home Super Saver Scheme?
The First Home Super Saver Scheme was introduced by the federal government as part of the 2017 Budget and offers you a more tax-effective way of saving for a home deposit. Under the scheme, you can contribute up to an additional $15k to your super each year on top of the 9.5% compulsory super contributions. Instead of being taxed at the marginal tax rate that usually applies to your salary, all funds saved through the scheme will only be taxed at 15%.
Once your savings hit the $30k cap, you can withdraw them to put towards your home deposit. Keep in mind, though, that these savings can only be withdrawn to put towards a deposit, and once you withdraw the money you've saved, you've got 12 months to sign up to buy or build a home.
How to get a home loan
Getting final approval for a home loan can be nerve-wracking, and there are a lot of options on the market. Do your research at comparison sites like Cantstar to get familiarised with the different lenders out there and the mortgage products on offer.
What do banks look for when evaluating a home loan application?
Generally speaking, mortgage providers use the five ‘C’s when assessing your ability to pay back a mortgage. These include:
- Collateral: The property that is used to secure the loan. If you're unable to make your mortgage payments as agreed, the bank has the right to seize your property to repay the debt.
- Capital: Your accumulated assets, such as savings, vehicles, valuable possessions etc.
- Capacity: Your ability to pay back the loan, measured by your current income against existing debts and your proposed loan repayments
- Character: A combination of all the above in addition to factors such as how long you’ve been employed at your current job, how long you’ve lived at your current residence etc.
- Conditions: This refers to the financial conditions that exixt at the time that you submit your application (specifically, your interest rate, principal amount and other market conditions).
How to get pre-approved for a home loan
Pre-approval is basically a guarantee to be approved for a loan if you apply for it, which is especially useful if you’re in the midst of searching for that perfect first home. There are three key steps to the mortgage pre-approval application process:
- Analyse your borrowing capacity: Be realistic about how much you should be able to borrow based on your income, expenses, assets and any current debts.
- Compare different home loans: Have a look at the different types of home loans on the market (such as variable vs. fixed, interest-only or principal and interest etc.) and decide which one is right for your situation.
- Apply for pre-approval: Most lenders and banks allow you to apply for home loan pre-approval online, on the phone or in person. You’ll still need to submit a full home loan application once a vendor has accepted your offer on a home.
Which mortgage is best: interest-only or principal and interest?
Most home loans fall into the category of 'principal and interest' loans, which means your repayments go towards paying off the principal (total amount borrowed) as well as the interest for the period.
Interest-only home loans, on the other hand, refer to home loans where your repayments only cover the interest on the amount you have borrowed. During the interest-only period, there is no reduction in the principal.
Interest-only home loans can provide some short-term benefits by minimising the repayments at the start of the loan, which can help you maximise the amount of money you can borrow and free up money to put toward other expenses (such as stamp duty).
However, the amount of money you owe doesn’t reduce during the interest-only period, which means you'll end up paying a lot more interest over the life of the loan, compared to a principal and interest loan. With that mind, it’s usually wiser to choose a principal and interest loan if it’s within your financial capacity.
Which mortgage is best: variable rate, fixed rate or split?
With a variable-rate home loan, the interest rate on your mortgage can change if official interest rates go up or down in line with the Reserve Bank’s cash rate.
With a fixed rate home loan, the interest rate on your mortgage doesn’t change for an agreed period (usually 1-5 years) regardless of what happens to official interest rates.
A split rate mortgage combines elements of fixed rate and variable rate mortgages. For example, you can have 80% of your home loan at a fixed rate with the remaining 20% at a variable rate.
So, which is best? The answer is that it depends. Fixed-rate home loans can make it easier to budget because your mortgage repayments will stay the same over the fixed-rate period. The disadvantage is that if official interest rates fall, yours will remain the same.
A split-rate home loan can be beneficial because it gives you some of the benefits of both fixed-rate and variable rate loans. You won’t save as much if interest rates fall, but you also won’t be as affected by rate hikes as you would with a variable rate loan.
How to find the right property
When you’re in the process of looking for a first home, it’s important to choose a property that offers a good balance between growth potential and liveability – especially because you’ll most likely be living in it for at least 12 months to get access to your state’s first home buyer grant.
If you’re looking to buy but aren’t sure what to look for when viewing a house, download our essential property purchase checklist to print off and take with you to your next inspection.
How to choose the best suburb
Deciding on where to buy is a personal decision and depends on what suburb characteristics are important to you. For example, if you have school-aged children, you’ll most likely want to choose an area that’s in close proximity to schools. If you work in the city, you might want to live in a suburb with good transport options.
Aside from your own preferences, it’s also important to consider whether the prospective location is somewhere with healthy demand. Ideally, you want to choose a suburb that’s within your budget but also has enough demand if you decide to rent it out or sell it.
Typically, people look for properties that are:
- Within easy reach of areas of employment, like hospitals, large shopping malls, airports, business districts or army bases
- Near the city/business district for young professional sharers or couples
- If it’s a family home, close to desirable schools, parks, shops and other facilities
- Close to public transport
Take a look at our suburb profiles to compare the features of different areas you’re considering.
- The best suburbs in Melbourne for schools
- Where are the best places to buy investment property in Sydney?
- Where are the best places to buy investment property in Melbourne?
Should you buy a house or an apartment?
There are a number of potential advantages and disadvantages to buying a house or an apartment.
If you’re considering buying a house, consider the following pros and cons:
- Autonomy over the property
- Attractive to families and student sharers
- Possibility of renovating/enlarging
- No strata/management fees
- More to maintain (i.e., yard, garage)
- No on-the-ground assistance from body corporate/strata managers
- Typically requires larger deposit than apartments
There are plenty of pluses and minuses to buying apartments as investments, too. Here are a few considerations:
- Some maintenance and admin is taken care of by strata management
- Less upfront investment needed compared to a house
- Likely to appeal to young professional sharers, international students
- Smaller deposit required on average
- Depending on the market, it could be harder to fill if you decide to rent it out: Sydney and Melbourne, for example, are experiencing apartment booms
- No chance to extend or enlarge the property in the future
- Potentially less capital growth than a house
How to inspect a property before purchase
If you’ve thinking seriously about buying a property, it pays to be thorough when inspecting it. Doing the following basic maintenance checks can save you from costly repair work down the track:
- Check for evidence of water damage, mould and corrosion, especially in ‘wet’ areas like the bathroom and kitchen
- Check for sagging in the ceiling, which can be evidence of defects
- Check for cracks in the walls, which can indicate bigger structural concerns
- Make sure the external roof lines are straight
- Check that the building has a good drainage system e.g. that roof downpipes run to storm water drains
It’s also worthwhile engaging an independent building inspector to assess the property for you and make sure it’s sound before you make an offer.
How the buying process works
Great news! You’ve found a property that ticks all the right boxes and you’re ready to make an offer. Here’s what you need to know:
How to make an offer on a property
Before you make an offer on a property, make sure you’ve researched the value and growth of the suburb you want to buy in and the wider property market. Understanding the market will help you know what’s reasonable when it comes to making an offer, whether the home is being sold by expression of interest, auction or private treaty.
If the home is being sold by expression of interest or private treaty, you can usually make an offer by speaking to the agent in person, online or over the phone. In the case of a private treaty, the agent will negotiate a price with you on behalf of the vendor.
How does an auction work?
Sellers who want to attract more buyers and get the best possible sale price often choose to put their house up for auction, a selling method that thrives on the element of face-to-face competition between potential buyers.
An auction is a publicly or privately held event organised by a real estate agent on a specific date. It’s the final point after weeks of marketing and advertising, with potential buyers gathering to bid on a property until the highest offer is made.
If a house is being sold by auction, you will need to make an offer on auction day. Once the reserve price (minimum selling price) is met, it will sell to the highest bidder on the day – so it’s a good idea to have a strict maximum offer in mind and stick to it.
What does ‘exchange of contracts’ mean?
Once your offer on a property is accepted (whether at auction or by private treaty or expression of interest), you and the seller enter into the contract exchange. At this stage, you will need a solicitor or conveyancer to assist with reviewing the terms and conditions of the contract of sale and preparing documents relating to the transfer of ownership. The contract usually includes:
- References to the zoning of the property
- Utility connections
- Any special conditions of sale or deadlines
- Purchase price and settlement date
- Deposit and payment date
- Matters relating to title (references to covenants, restrictions, easements etc.)
- Owners corporation matters
Once both parties agree to the terms of the contract, your solicitor, your lender, and the seller’s representatives will all meet to sign and exchange documents, and arrange the payment for the seller.
What is a cooling off period?
Once you’ve exchanged contracts and paid a deposit on your first home, you have a legal right over that property known as a ‘financial interest’. At this time, there’s a short cooling off period (in most states and territories) during which you can get out of the contract if you provide written notice, but in some cases, you won’t receive your whole deposit back.
Note: There is no cooling-off period if you buy at auction.
A contract of sale without a cooling off period is known as an ‘unconditional contract’. It’s advisable not to sign an unconditional contract if you haven’t been pre-approved for a home loan.
The usual real estate cooling off period is as follows:
- NSW: 5 business days (Fair Trading NSW). Buyer forfeits 0.25% of the purchase price to the seller.
- VIC: 3 business days (Consumer Affairs Victoria). Buyer must pay 0.2% of the purchase price to the seller.
- QLD: 5 business days (Queensland Government). Seller may keep 0.25% of the purchase price from the deposit paid by the buyer.
- SA: 2 business days (Department of Premier and Cabinet SA). Any deposit paid that was over $100 will be refunded in full, but the buyer forfeits any holding deposit.
- WA: No cooling-off period applies unless contract specifies a cooling-off period (Department of Commerce WA).
- ACT: 5 business days (Conveyancing Canberra). Buyer forfeits 0.25% of the purchase price to the seller.
- NT: 4 business days (Northern Territory Government). Both purchase deposit and holding deposit will be refunded to the buyer.
- TAS: No cooling-off period applies to any sale of property in Tasmania (Consumer Affairs and Fair Trading Tasmania). Source: Canstar
What is stamp duty and when is it due?
Stamp duty is a tax paid on the purchase of any real estate. It’s always paid for by the buyer. The rate you pay on stamp duty will depend on which state you’re in, as every state has different rules and regulations, as well as on the cost of the property.
As mentioned above, there are also concessions and grants as part of the First Home Buyer scheme, although these vary per state as well.
Just as the stamp duty rate varies from state to state, so does the timeframe in which you need to pay it. Check your state government’s website for exact details on when stamp duty is due after you settle.
Good luck buying your first home!
This is an incredibly exciting time, and we hope this guide helps you on your way to securing that dream first home.
For more guidance, check out our ultimate home buying checklist.