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Young couple smiling and holding keys to their first home

By Adam Smith | Journalist at finder.com.au

Getting your slice of home ownership and finding the right home loan can seem daunting. With media telling us that we can't have our avocado and eat it too, it can be easy to be disheartened. However, if you do some legwork and research the costs of home-ownership, build yourself a rate buffer, and decide what product features (and rate) you need, you'll be well and truly on your way to sourcing the right loan for you.

In fact, first home buyers are finding a way into the market. According to the Australian Bureau of Statistics the proportion of first home buyers entering the market rose to 15% in June. That's the highest in two-and-a-half years.

So, it's certainly possible to get your foot on the property ladder. You just need to know how to find the right home loan to help you get there. Here are some of the top tips for choosing your first home loan.

1. Calculate the full cost of home ownership

Many people don't think about all the costs involved in buying their first home. There's a bit more involved than simply the purchase price of your home.

As most would-be first home buyers know, the biggest expense you'll be facing is your deposit. Most lenders will require somewhere between a 5% and 20% deposit. When you look at Aussie house prices, 20% can seem pretty daunting.

The good news is that many lenders do accept deposits on the smaller end of the scale. The bad news is that you'll end up paying for lenders mortgage insurance (LMI). This is an insurance policy that protects your lender in case you default. Once again, there's a bit of good news here. While LMI can be costly, a lot of lenders will capitalise this cost onto your home loan so you're not out-of-pocket up front.

Another cost you could end up facing is stamp duty. Stamp duty is a government charge on big purchases like property and vehicles. It can run into the tens of thousands of dollars.

Ready for some more good news? Depending on which state or territory you live in, you might be exempt from stamp duty. You can head here to find out whether you'll be let off the hook.

In addition to costs like this, you need to prepare yourself for some of the odds and ends associated with moving. You'll likely need to hire removalists, and you may need to pay for things like building and pest inspections. You can see some of the common hidden costs of moving house in this guide.

2. Build yourself a rate buffer

When you're comparing home loans, the biggest factor you're likely to consider as a first-time buyer is whether or not a loan fits within your budget. That's wise planning, but you also need to think a bit beyond the rate on offer.

If you're choosing a variable rate home loan, that means that your rate could move up or down, depending on economic factors. It's wise to build in at least a 1% buffer in your calculations. In other words, find out what your repayments would be if rates were to rise 1% and base your decision on those repayments rather than the ones on offer right now.

This, of course, is where a fixed rate home loan can come in very handy for a first-time buyer. When you're first entering into the commitment of a home loan, it's nice to know you have a period of stability to get used to making repayments. By fixing your home loan you can give yourself time to settle into the reality of being a homeowner.

Even if you do decide to fix, make sure to consider what will happen when the fixed rate term ends. You may opt to fix your home loan for another period of time, or you could opt to move to a variable rate loan. Either way, crunch some numbers to make sure you won't be in too big a financial pinch if the rates on offer rise during your fixed term.

3. Know what help is available

The really good news for first home buyers is that there's a lot of help out there. As we discussed before, you may find that you're exempt from stamp duty. This could save you some serious money, and those savings could help get you in the market quicker.

In addition to stamp duty savings, many states and territories offer First Home Owner Grants. These grants can range from $7,000 all the way up to $26,000 depending on where you live. It's worth checking to see the eligibility criteria for your state to make sure you get as much help as possible.

Finding out what help you can get can guide you to the right home loan product for you. If you don't have to pay stamp duty or are eligible for a First Home Owner Grant, you'll likely have a bigger deposit to work with, and your home loan options will open up considerably. NSW for example has just recently scrapped stamp duty on houses up to $650,000 this gives first home buyers up to $20,000 extra for a deposit, which is a big deal in the current market.

4. Try to get ahead

It’s certainly tempting to make the bare minimum repayments when you're first getting used to your home loan. Resisting this temptation can pay huge dividends in the years ahead.

Try to pick a home loan that offers some repayment flexibility. Most variable rate home loans will allow you to make as many extra repayments as you want without penalty. A number of fixed rate home loans will allow you to make a set amount of extra repayments per year. Either way, you'll be getting ahead on your home loan.

Getting ahead on your home loan can not only shave thousands of dollars off the amount you pay in interest. It can also give you that all-important buffer should you find yourself struggling financially. You should consider picking a home loan that lets you build up this buffer.

5. Figure out what features you want

Home loans these days offer a whole host of features that can help you better manage your finances. Figuring out which ones you want and which you can do without will help you decide what product is right for you.

Some home loans may offer what's known as an offset account. This is a linked transaction account that reduces the amount of interest you pay by offsetting the interest calculations by the funds in the account. In other words, if you have a $600,000 home loan with $50,000 in an offset account, you only get charged interest on $550,000.

Offset accounts are very handy features if you plan on holding larger sums of money in your account. But, they also often carry fees. If you don't think you'd actually use an offset account, you shouldn't pay for one.

Another feature you may come across is a split facility. This allows you to split your home loan into fixed rate and variable rate portions. This way at least part of your home loan is insulated from rate rises, while another part can benefit from rate cuts. There can be fees associated with splitting your loan, though, so make sure to read the fine print.

Package loans can also be handy tools. These loans allow you to package a number of banking products together, and give you steep discounts on rates and banking fees in exchange for a single annual fee. With a package loan, you could potentially save not only on your home loan, but on transaction accounts, credit cards and insurance.

With all these features, however, it's important to consider your own individual circumstances. Think about the features you'll use and those you probably won't, and don't pay for a fancy feature you don't need.

Picking your first home loan is a big choice. It will help set the tone for how you manage what will most likely be the biggest financial commitment you'll ever make. It's important to do your research and consider your goals and needs. Ultimately, though, if you keep a few of these tips in mind, the process can be smooth and stress-free.


Important information

Information on this website is general and has been prepared without taking into account your objectives, financial situation or needs. You should consider whether this information is suitable for your objectives, financial situation and needs before acting on the information provided.