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Last updated on May 16th, 2022 at 04:50 am
It’s not called the great Australian dream for nothing. For most Aussies, buying their first home is a major life goal.
But the reality is, buying your first home can be overwhelming. Understanding how much you can borrow, calculating upfront costs, saving for a deposit, keeping up-to-date with the latest government grants, researching the property market and deciding whether to buy new vs existing, are all part of the maze that first home buyers must navigate.
The good news is that it’s reasonably easy to master the property-buying basics. After reading this guide, you’ll know what you need to know to embark on your exciting home-buying journey.
The Australian government at both a state and federal level, treat first home buyers differently to other property purchasers.
To officially qualify as a first home buyer and be in line for government grants, you’ll need to meet the following criteria:
Both renting and buying have their pros and cons and the decision can be a tough one.
The advantage of renting is that it’s usually cheaper than having to make mortgage repayments as well as cover costs such as home repairs and council fees. It’s also easier to move out of a rental property if you decide you want to live somewhere else than it is to sell or rent out a property you own.
The catch is that renters don’t build equity in an appreciating asset on the average, renting repayments outstrip mortgages.
The situation is reversed for homeowners. They typically have high housing costs and can’t move easily. However, they can look forward to eventually paying off their mortgage then having minimal housing costs and owning a valuable and appreciating asset.
If you’re considering buying your first property, you’ll need to follow a series of steps. Let’s dive into each step one by one.
If you’re going to ask a financial institution to lend you hundreds of thousands of dollars, you’ll have to demonstrate you’re aware of what you’re earning and spending and that you’re capable of making your mortgage repayments.
You probably know what your income is, but are you aware of exactly how much you spend on the following:
As a general rule, the higher your income and the lower your living expenses, the more you will be able to borrow.
Financial institutions will ask you to provide detailed information about your:
Fortunately, there are now plenty of online ‘borrowing calculators’ that provide estimates of how much money a particular financial institution is likely to lend you.
Having money behind you is crucial for a lender. A bigger deposit is more important than having a high income because it shows a pattern of positive saving. High credit limits are seen as a red flag, as lenders will assume you may spend up to your card limit at any moment. To a lender, a $20,000 credit card limit is essentially the same as having a $20,000 credit card debt. Consider lowering your limits if possible.
It’s important to understand what your personal borrowing power is at the beginning of the purchasing process, as it will determine the type of property you can afford to buy.
Understanding and improving your borrowing power could be the difference between having the funds to buy your dream home and missing out. Do your research into different lenders and repayments plans before you make a decision. Keeping a strong credit score, saving for a deposit, and considering your daily expenses are the first steps to increasing your borrowing power.
If you are about to jump into the housing market and buy your first home, you should be aware that there are plenty of hidden costs that you might not have considered. From stamp duty, lenders mortgage insurance and sneaky fees, being aware of the hidden costs can help to ensure you have adequate savings and are organised for your big property purchase.
On top of saving for a deposit, you can expect to shell out thousands of dollars on various fees, charges and forms of insurance during the property-purchasing process. Be prepared to put your hand in your pocket for the following:
You’ll almost always need to save at least 10% of the expected purchase price and ideally 20%.
Stamp, aka transfer, duty can vary depending on what state or territory you’re in, what income you earn and whether you’re buying a new or existing property. Stamp duty can be a major expense for those home buyers who aren’t exempted from it.
If you haven’t managed to save a 20% deposit, or you are unable to provide adequate proof of your financial situation, income and employment history, you will need to pay Lender’s Mortgage Insurance (LMI) or have a guarantor ready to secure the loan.
The cost will vary depending on factors such as the size of your deposit and your employment situation but expect to pay around 1%-3% of the property’s purchase price.
Your lender will also require you to take out building insurance. The cost of this varies but expect to pay at least $1,000 a year for home, building and contents insurance.
You may also want to take out mortgage protection insurance, which will also cost at least $1000 a year.
It’s advisable to have a pest and building inspection done on any property you’re contemplating buying. This will usually cost around $300-$500.
Getting a solicitor or licensed conveyancer to review the Contract of Sale, perform checks on the title, and draft the settlement documents should cost around $700-$2,500.
State and territory governments charge mortgage registration fees ranging from $140-$190.
Your lender may charge you a mortgage application, mortgage registration and loan service fees.
You may have to pay thousands of dollars for a removalist and hundreds of dollars to get the electricity, gas, phone and internet connected (or reconnected).
On top of this, you will need to consider that when you are buying an existing home, you will need to pay the vendor for the council rates or utility rates owing or that have been paid until the end of the quarter. All of these calculations are arranged by your conveyancing solicitor and will be outlined towards the end of the property purchase process once the essential property searches have been carried out.
It’s not always a good idea to the borrow the maximum amount a financial institution will lend you.
You need to think about both your current and likely future financial situation before deciding what sized mortgage you can realistically manage.
For example, a couple may be able to easily pay the mortgage repayments when both are working full-time but struggle if one of them takes unpaid maternity or paternity leave.
Don’t be tempted to understate your expenses. You want a home loan that puts you in a better financial position than you are currently in, not a stressful one. Organise any other financial commitments or debts you may have, as any defaults will show up on your credit history and affect your future borrowing power.
Australia has some of the world’s most expensive property markets and saving a 10% deposit, let alone a 20% one, can be challenging.
It’s become increasingly common for older Australians to lend or gift their children money towards a home deposit. But even if you do receive financial assistance from the Bank of Mum and Dad, you’ll probably still need to create a savings plan and prepare to tighten your belt for a prolonged period.
If you’re struggling to save a 20% deposit, the good news is that there are plenty of lenders that require a far smaller deposit – with some as low as only 5%. On the purchase of a $400,000 property, that is only a $20,000 deposit. So while it will take some work to save that money, it is certainly doable for young couples or even singles wanting to get into their own home. Just note that Lenders Mortgage Insurance might be payable.
Budgeting and saving are not always easy, so one useful way to better manage your expenses is to allow yourself a weekly ‘float’. Transfer your weekly spending money into a separate account and only access it via debit card. That way, you have a fixed amount you can spend each week and you know you’ll be able to save. All those savings you are collecting should be transferred into a separate high-interest saving account, not to be touched.
The First Home Owner Grant (FHOG) was introduced in 2000 as a way to offset the effects of GST on home ownership for people who are purchasing their first home. It is a national scheme which is funded by the individual states and territories and administered under their own legislation.
The FHOG is a payment issued by the government, to help new and young home buyers get into a new home they can live in.
To receive the grant, you must be buying or building a new home valued at under $750,000. The payment is made to you as a grant and is separate to other exemptions such as the stamp duty rebates.
Your new home can be a house, townhouse, apartment, or unit but must be less than five years old and be the first sale of the property. Established homes are no longer eligible to receive the FHOG.
If you’re a first home buyer in Queensland, you are eligible for a grant of $15,000 if you’re buying a new property valued under $750,000.
In NSW, you get up to $10,000 if you buy a new home valued under $600,000 or build one valued under $750,000.
In Victoria, if you’re buying or building a home valued under $750,000, you get up $10,000 if it’s in a metropolitan area and $20,000 if it’s in a regional area.
The ACT government doesn’t offer first home buyers grants but does waive stamp duty for most of them.
The First Home Super Saver Scheme allows first-home buyers to make up to $30,000 in voluntary contributions to their superannuation fund to save for a home, with a limit of $15,000 per financial year.
Voluntary contributions are taxed at a lower rate compared to income, and paying less tax allows first-home buyers to save money faster. Applicants are also entitled to access any earnings on their extra contributions.
First home buyer NSW: In NSW, if you’re a first home buyer, you may be entitled to a concessional rate of transfer duty or even an exemption from paying it altogether under the First Home Buyers Assistance scheme (FHBAS). First home buyers don’t have to pay any stamp duty on new homes valued at less than $800,000 or existing homes valued at less than $650,000. First home buyers are also eligible for a concessional rate on new homes valued between $800,000 – $1,000,000 and existing homes valued between $650,000 – $800,000. Check whether you are eligible for the first home buyer grant NSW.
First Home Buyer Victoria: Victorian first home buyers don’t have to pay stamp duty on a house valued at under $600,000 and pay concessional rates for ones valued between $600,000 – $750,000. Check whether you are eligible for the fifirst home buyer grant Victoria.
Unless they are high-income earners, ACT residents don’t have to pay stamp duty regardless of the value of the property they are buying.
Queensland first home buyers can get a concession of up to $15,925 if they are buying a home valued under $550,000. Tasmanian and Western Australian first home buyers also get special stamp duty deals, but those in South Australia don’t.
This financial year, the Federal Government’s First Home Loan Deposit scheme will allow up to 10,000 first home buyers to purchase a property with a deposit of as little as 5% without having to take out Lenders Mortgage Insurance.
First-home buyers can apply for the First Home Loan Deposit Scheme which will allow eligible singles and couples to pay a deposit of as little as 5 per cent on their first home.
Under the scheme, the government acts as guarantor so borrowers won’t need to pay lenders mortgage insurance, which usually applies when buying with a deposit less than 20 per cent of the value of the property.
Both new and existing residential properties are eligible, but there are different price thresholds in each state, capital city and regional centre. The scheme is only available to owner-occupiers, and investment properties are not eligible.
Singles must have a taxable income under $125,000 in the previous financial year, and for couples, the income threshold is $200,000. Couples must be married or in a de factor relations
Your guarantor is someone who will co-sign your loan and become legally responsible for meeting mortgage payments if you can’t. You’re more likely to need one if you have less-than-great credit, a low deposit, or you’re in self-employment. While finding a guarantor means you’ll grab your dream home, it could place your guarantor at risk if you don’t meet your mortgage payments.
If someone goes guarantor for you, that means they are guaranteeing to make the repayments on your loan if you fail to. The upside of having a guarantor is that you can buy a home without having a 20% deposit saved and without having to pay for Lenders Mortgage Insurance. The downside is putting a relative in a financially risky situation.
There are many banks, credit unions and financial services companies in Australia that target first home buyers. To understand how the loans they offer work, it’s helpful to understand the following terms.
A variable rate home loan is one where the rate can go up and down depending on the state of the economy.
If you’re worried about your interest rate shooting up, you and your financial institution can agree to a fixed rate that won’t change for a specified period.
Imagine you get a $500,000 home loan with a fixed interest rate of 2%. You will need to pay $10,000 in interest every year. But you will also need to pay back the principal – that is, the $500,000 you originally borrowed and which you’re paying interest on. If on top of your interest payments, you also pay $50,000 to reduce the principal every year in 10 years you will have paid off your mortgage.
Borrowers aren’t always able to pay off the principal as well as make interest payments on it. In these cases, most lenders will provide an ‘interest only’ loan – that is, a loan where only interest payments have to be made.
Once you’ve done your sums, ticked all the necessary boxes and found a lender you like, the next step is to get conditional approval, aka pre-approval. This essentially means a financial institution has decided to loan you a certain amount of money once you find a property you want to buy.
Once you know how much you can spend, it’s time to work out what locations you’re interested in and what is happening with property prices in those locations.
It’s great to talk about buying your own home, but it’s hard to decide what would be right for you if you haven’t looked at all of the options.
Your options aren’t always limited to brand new houses — a home could mean anything from an off the plan apartment to a newly renovated duplex.
Buying an established home means you know what you’re getting. But building a new home lets you tailor the home to your tastes and needs.
Plenty of people want to sign a dotted line, get their furniture in, and start living in the house they inspected. But depending on where you buy, it can sometimes be cost-effective to build a new place rather than buy an existing home.
Buying ‘off the plan’ means committing to buy a property where construction hasn’t started yet, or where it’s only partially completed. Depending on the contract agreement, you may get a new home that has already been designed, with the option to change its finishes or fixtures.
This is the point where you select your new house and land package or buy an existing home, either at an auction or private sale. Once this is done, you’ll need to sign a Contract of Sale and make a deposit of, in most cases, 10% of the purchase price.
Within 30-90 days of signing the Contract of Sale, your solicitor or conveyancer, will meet with your lender and the seller’s representatives to exchange documents. On settlement day, your financial institution will transfer the money the seller is owed to them and you will take legal possession of your first home!
Building a new home is a huge financial and emotional investment, taking the extra time to do a thorough check on any prospective builder, their workmanship, references and credentials are crucial to finding the right builder for your job.
To ensure you are choosing a builder that is of the highest standard, be sure to explore their past builds and whether they have a history of quality work. Many new home builders and building specialists that are specialists in their field are recipients of industry awards and accolades and checking out any awards is a great way to check if you are choosing a builder that is a local expert.
Builders that are highly regarded are respected in their community, by both local trades and their customers – be sure to check out reviews and explore display homes to get a clear idea on previous work and to ensure their references and reputation check out.
Here’s a list of questions to ask your home builder before signing on the dotted line.
It’s true that the great Australian dream of buying your first home can be overwhelming at the best of times. As this guide has demonstrated, understanding how much you can borrow, calculating upfront costs, saving for a deposit, keeping up-to-date with the latest government grants, researching the property market and deciding whether to buy new vs existing, are all part of the first home buyer journey.
Having said that, owning your first home, building a home for your growing family and watching your home increase in value every year, can be incredibly rewarding.
The key takeaway from this first home buyer ultimate guide is awareness. Awareness of your living expenses, savings, borrowing power, preferred location, ideal property type, government grants, hidden upfront costs and the optimal home loan and lender for your unique situation.
At Achieve Homes, we’re here to help you get into your first home. If you’ve got any questions about this guide or anything else related to buying your first home, visit https://achievehomes.com.au/ to request a callback or book in our 100% free, no-obligation Free Home Consultation.
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