ARTICLE AT A GLANCE
With rising interest rates, high house prices and the increased cost of living, the dream of property ownership can seem out of reach for many first-time home buyers.
Unless you are lucky enough to have family wealth to fall back on or a generous inheritance to help you on your way, there is no doubt that there are some obstacles to overcome to get your foot on the property ladder. However, it can be done with clever planning and thinking outside the box.
In this article, we will look at the main issues facing prospective first home buyers and provide some valuable information to help you own your first property sooner.
I Want To Buy My Own Home; Where Should I Start?
If you have your eye on property ownership, it’s never too early to chat to a finance broker about your financial situation and the steps you can take to put you in a great position to buy your first home, either now or in future.
There is no cost for an initial meeting with NBS Home Loans (in fact, there is usually no cost for first-home buyers to use our services at any time), so you can keep more money in your pocket to save for your own home.
At NBS Home Loans, we often work with clients for two or more years before they are ready to make their first purchase, so you certainly don’t need to be prepared to take the plunge before having an initial chat.
- When we meet with you, we’ll check your indicative borrowing capacity so you have a guide to the maximum you can afford to pay for a house.
- We’ll help you set goals for an appropriate deposit if you don’t already have one in place, and we’ll check if you qualify for any first home buyer grants or schemes.
- We’ll also talk you through any other options that might be available to you based on your personal circumstances, such as guarantor loans or co-borrowing scenarios.
After our initial chat, you’ll have a clearer idea about the properties and areas that fall within your budget and the steps you need to take toward property ownership.
There is no substitute for personalised advice unique to your goals and financial situation.
Below, you will find general information about first home ownership based on some of the most common daily questions.
Do I Qualify As A First Home Buyer?
It’s not a trick question! While in most cases, it will be evident if someone is a first home buyer, in other cases, it is less clear-cut.
What if you’ve owned property overseas but never in Australia? Perhaps you’ve never owned property before, but you are buying with someone who has.
The answers to these questions are essential because they determine if you are eligible for any first home buyer assistance through State or Federal Government Schemes.
The answers will also determine if you may be eligible for any special First Home Buyer offers (e.g. discounted or waived Lenders Mortgage Insurance (LMI), or discounted interest rates).
First Home Buyer Home Loan Schemes
Various schemes are available as of September 2022 to help eligible home buyers. Some of the primary schemes at the time of writing include the following.
First Home Buyer Assistance Scheme
A NSW scheme that allows a full or partial transfer (stamp) duty exemption on homes purchased by eligible first home buyers.
Property price caps apply.
First Home Owner Grant (New Home)
A NSW scheme that provides a $10,000 grant to eligible first home buyers who are buying or building a new home that has never been lived in or in some cases, has been substantially renovated.
Property price caps apply.
An Australia-wide scheme that allows eligible first home buyers to purchase a home with as little as a 5% deposit without the need to pay Lenders Mortgage Insurance (LMI). Under this scheme, the Australian Government provides a guarantee to the lender in place of the borrower paying LMI.
Property price caps apply.
LMI – Lenders Mortgage Insurance
You may need to pay LMI if you borrow more than 80% of the value of a property. In simple terms, LMI is insurance that protects the bank if you cannot repay the loan and the property gets sold for less than the amount still owing on your loan.
LMI only protects the lender, not the borrower. Depending on the loan size, it can run to tens of thousands of dollars in costs, although this can usually be rolled into the loan amount and repaid over the term of the home loan rather than being paid upfront.
This is a NSW scheme that allows key-worker first home buyers (police, teachers and nurses), as well as single people over 50 years old and single parents, to purchase a home with as little as a 2% deposit without the need to pay Lenders Mortgage Insurance (LMI). Under this scheme, the NSW Government will pay a proportion of the purchase price of eligible property in exchange for an equivalent ownership share of the property.
Property price caps apply.
This NSW Scheme is due to commence 15 January 2023. The scheme that will give eligible first home buyers of homes up to $1.5 million the choice between paying upfront stamp duty, or an annual land tax to help spread out the cost.
Additional Home Loan Schemes for First Home Buyers
Several additional schemes are also in place or expected to commence soon.
Although these are not explicitly targeted at first home buyers, they may assist first home buyers depending on their circumstances.
These include:
Helps single parents with dependents purchase a house with a deposit of at least 2%.
Due to commence in October 2022. This scheme will help eligible buyers in rural and regional areas purchase newly-built homes with as little as a 5% deposit.
You can check the eligibility of each scheme above by clicking on their headings – they link to each scheme.
Different schemes and offers have other eligibility criteria, so you may be considered a first home buyer under one but not another. You may only be entitled to some first-home buyer benefits.
Price caps apply to both the Family Home Guarantee and Regional Home Guarantee schemes.
Both are open to first-home buyers and people who previously owned property.
NBS Home Loans can take the hard work out of this process by talking you through any first home buyer benefits for which you may be eligible.
How Much Can I Borrow for My First Home Loan?
What Is My Borrowing Capacity for a Home Loan?
Your borrowing capacity is another term for how much you can afford.
Borrowing capacity considers your income, expenses, liabilities (debts) and assets (things you own). Although these factors may change over time, your borrowing capacity is determined when you apply for a loan.
Borrowing capacity is a big obstacle for many first home buyers, especially if they borrow alone on one income.
Interest Rate Rises and First Home Buyers
When interest rates increase (as is the case in the current market), borrowing capacity decreases simultaneously.
As interest rates increase, lenders work out how much you can afford to repay on your loan each month and then use this figure to calculate the maximum loan amount you can afford.
Higher interest rates mean higher monthly loan repayments, so banks will be willing to offer you less money overall to avoid running the risk of your monthly payments rising to a level you can no longer afford.
We have written a useful article, ‘Understanding Interest Rates in Australia’ you can also read.
Will My Borrowing Capacity Be Enough to Buy a House?
Rising interest rates have resulted in a situation where many first home buyers find they can borrow less than they had hoped, especially as house prices (although slowly falling in most areas) remain pretty high.
As a guide, the current borrowing capacity for someone with a salary of $80,000 a year, no debt, no dependant and moderate monthly expenses would be around $500,000 – $530,000, and this will drop further if rates increase.
By comparison, realestate.com.au puts the median price for a one-bedroom apartment in Sydney at $735,000 as of September 2022.
The old catch cry of ‘entitled millennials’ having unrealistic expectations is simply not true.
House prices are now 16 times the median wage vs 4 times the median wage in the 80s, meaning even modest, entry-level units can be a stretch for many first-home buyers.
Furthermore, a recent Grattan Institute study found that when adjusted for wage growth and property prices, a loan interest rate of 7% would impact today’s borrowers as the 17% rates experienced by Australia in the 1980s.
While we’re still a fair way off this figure, it’s easy to see why many borrowers have so acutely felt each recent half-a-per-cent increase.
The bottom line:
You are not imagining it; it’s hard for first-home buyers, especially millennials, but it doesn’t have to be impossible!
How Can I Afford to Buy My First Home?
While these figures quoted above seem discouraging, getting a foot onto the property ladder can still be possible.
The most common advice for first-time home buyers is to consider buying outside your preferred area (mainly if you live in a capital city or an expensive area).
Look for small properties with a lower purchase price, or seek out older properties in good condition that you can improve with some cost-effective DIY work.
Other first home buyers can get their start by buying in conjunction with other family members or ‘rentvesting’ (purchasing an investment property within your budget but continuing to live and pay rent in your preferred location).
Some first home buyers may also be able to live with their parents longer and buy an investment property for their initial home purchase to use any rent collected to help make repayments.
It’s important to note, however, that most home buyer schemes require you to live in the property you purchase, so we will help you weigh the pros and cons of each strategy to decide if it’s appropriate for your needs.
Can I Use My Parents’ Income To Help Increase My Borrowing Capacity To Get a Home Loan?
Using someone else’s income towards your home loan when that person will not be listed on the title of your property as an owner is known as a ‘servicing guarantor’.
Very few lenders will accept anyone other than your legal spouse for a servicing guarantor home loan, and even then, there must be a specific set of circumstances in place for this to be an option.
Most first-time home buyers will not be able to use their parents’ income to ‘guarantee’ they can repay the loan.
Using your parents’ income towards the loan is usually only possible if you buy the property jointly with your parents.
How Can I Improve My Borrowing Capacity For a Home Loan?
You can do some simple things to improve your borrowing capacity and put you in the best possible position to secure a loan.
Reduce Spending
Reducing non-essential discretionary spending will help you save faster and help your loan application as your monthly expenses will be lower, freeing up more of your income for repaying a home loan.
Pay Off Debt
Paying off any debt (or, ideally, minimising any debt you take on in the first place) will also make a massive difference to your borrowing capacity. Any existing debt will reduce your borrowing capacity significantly – usually by much more than the amount you owe.
Borrowing Capacity Considerations
Lastly, borrowing capacity can vary wildly between different lenders as each has different policies and niches. Each lender will treat different sorts of income in different ways (e.g. some lenders may not like casual income, while others may be happy to accept it).
An experienced mortgage broker like NBS Home Loans can help you find a lender who will maximise your borrowing capacity without taking on unmanageable debt levels.
At NBS Home Loans, we will help you to develop a long-term strategy to help you get into the property market and will continue to work with you throughout the entire process.
How Much Of a Deposit Do I Need to Buy My Own Home?
You’ll often hear that you should aim for a 20% deposit when buying a property.
If you want to buy a property worth $500,000, the ideal scenario would be to save a deposit of $100,000.
Having a 20% deposit opens up a vast range of loan options and can help you avoid paying tens of thousands of dollars in extra expenses such as Lender’s Mortgage Insurance (LMI).
However, saving a deposit of any amount – let alone 20% – is a huge obstacle for many first home buyers, significantly younger millennial first home buyers.
- You may be just starting in your career and still on a comparatively low salary
- You are probably already paying a significant amount in rent each week
- You may already have existing debt you are chipping away at, such as a car loan, personal loans, credit cards or education debt
- You may be saving as a single person or a single-income family
- Even if you are living with your parents and contributing to the household expenses, you may still be struggling with the effects of inflation and the rising cost of living
In these situations, there may not be a lot of money left over for emergencies. let alone saving for a house deposit.
It’s important to know that, in reality, most home buyers DO NOT have a 20% deposit, and in many cases, that’s OK!
What If I Don’t Have a 20% Deposit for My First Home Loan?
If saving a 20% deposit is out of reach, and you don’t have a rich great aunt willing to gift you a hefty sum of cash, it’s essential to know that some options may still be available depending on your circumstances.
Below we look at the main options available to first-home buyers.
1. Check If You Are Eligible for Any Home Buyer Assistance Schemes or Grants
As mentioned above, there are several schemes designed to help first home buyers into their own homes sooner. If you are eligible for the First Home Owner Grant (New Homes), some lenders will allow you to use the $10,000 grant towards your deposit.
Of particular note is the First Home Guarantee Scheme, which can help eligible first home buyers purchase their property with as little as a 5% deposit without needing to pay the additional costs of LMI, which would typically be payable with a deposit of less than 20%. However, places on the scheme are limited, and not all lenders participate in this scheme. A property price cap is also in place, which varies based on the suburb.
If you are not eligible for the First Home Guarantee scheme, are unsuccessful in securing a place, or your preferred lender does not participate in the scheme, the options below may also be worth considering.
2. Check If You Qualify For Any Professional Benefits With Your Home Loan
Some lenders will accept a smaller deposit (often 10%) without LMI based on your profession. Usually, these special offers only apply to high-income fields such as medical, allied health, and legal professionals.
Due to the perceived stability of these jobs, lenders tend to consider these professions lower risk and offer unique benefits.
In most cases, you need to earn a substantial minimum salary in these fields to qualify, but some first home buyers who are already well established in their careers may qualify.
At NBS Home Loans, we can help you determine if this is something for which you may be eligible.
3. Consider Lenders Who Offer Home Loans of Up to 85% Without LMI
A small number of lenders offer loans of up to 85% without LMI for first-home buyers, meaning you only need a 15% deposit (or, if you have less than 15%, you may only need to pay LMI on the difference up to 15% instead of 20%).
At NBS Home Loans, we can help you determine if these lenders are a good fit for your circumstances and will provide calculations to show your overall position with various lenders.
4. Have a Family Member Act as a Security Guarantor for Your First Home Loan
If you don’t have a 20% deposit but want to avoid paying LMI costs, many lenders will allow you the option of a security guarantor loan.
An eligible close relative – usually a parent – can act as a guarantor and use part of their property as security for yours instead of paying a full deposit.
For this to be an option, the guarantor has to be in a solid financial position and have sufficient property equity (i.e. the guarantor must have fully or substantially paid off their home loan).
This is because your lender will effectively issue a mortgage (or second mortgage if one already exists) against the guarantor’s property in addition to providing a mortgage against the property you are purchasing.
Being a security guarantor is risky. For example, if you default on your home loan, the guarantor needs to step in and make the repayments. Otherwise, they run the risk of losing their own home.
For the reasons above, while guarantor loans may be suitable sometimes, they tend not to be a popular option.
We more commonly see parents in these sorts of financial positions gift cash towards a first home deposit rather than take on the risk of acting as a guarantor.
5. Save a Smaller Deposit and Pay the Lenders Mortgage Insurance (LMI) Costs
If you have a minimum deposit of 5% and none of the other options mentioned above applies to you, it can sometimes be worthwhile borrowing the remaining 95% and wearing the LMI costs.
LMI costs can typically run to tens of thousands of dollars -no small sum – but in some circumstances, it makes financial sense to purchase before saving up a full 20% deposit.
For example, the purchase may be time sensitive, or you would save more in rent than you would lose in LMI by buying sooner.
Most lenders will allow you to capitalise on LMI by adding the LMI costs to the amount you borrow, so you don’t need to come up with a single lump sum payment upfront.
Can I Borrow Up to 98% On A Home Loan as a First Home Buyer?
People Also Ask: “Can I Borrow up to 100% On a Home Loan?
A common question we receive is if first home buyers can borrow up to 100% of the property’s value (also known as 100% loan-to-value ratio, or LVR), which would mean no deposit would be required.
The simple answer is no. Borrowing 100% on a home loan as a first home loan buyer is no longer possible and is not supported by any lenders.
Most loans require a minimum deposit of 5% PLUS enough savings to cover additional costs such as legal fees, moving expenses and any stamp duty you are required to pay.
In some circumstances, such as some of the schemes mentioned above, it may be possible to borrow up to 98% of the property value (98% LVR), meaning you only need to provide a 2% deposit. However, it’s important to note that places on these schemes are limited, and you will still need to cover any additional costs on top of the amount you borrow.
Some lenders will also allow you to capitalise LMI costs up to a total loan size of 98% LVR, which is essentially a 95% loan towards the property price plus up to 3% LMI added on to the amount you borrow.
Do First Home Buyers Have to Pay Stamp Duty?
Stamp Duty exemptions and concessions for first-home buyers vary by state.
In NSW, the First Home Buyer Assistance Scheme provides an exemption on paying transfer (stamp) duty on eligible homes purchased by eligible first home buyers.
If you qualify for this scheme, you pay no transfer duty on properties less than $650,000 or vacant land less than $350,000, and discounted transfer duty if the property value is between $650,000 and $800,000, or $350,000 to $450,000 for vacant land.
Transfer duty is payable on the total value if your property is valued above $800,000 or $450,000 for vacant land.
When the NSW First Home Buyer Choice Scheme commences in early 2023, first home buyers who are purchasing a property up to $1.5 million and would otherwise have to pay Stamp Duty may be eligible to opt into paying an annual land tax instead.
If you are purchasing in another state, chat with NBS Home Loans about the stamp duty exemptions or concessions in your location.
You can also visit your State or Territory’s Revenue website for more information.
It’s important to remember that even if you don’t need to pay stamp duty, you will need to have enough money saved to cover the other costs associated with buying a property and home ownership, such as legal and moving costs.
We’re here to help First Home Buyers.
NBS Home Loans will help you weigh up the choice of lenders and products to find a home loan that is a great overall fit for your needs, and offers a competitive interest rate.
NBS Home Loans has written a helpful article for Australians on UNDERSTANDING INTEREST RATES, expanding further on our information here: https://www.nbshomeloans.com.au/understanding-interest-rates-in-australia-in-2022/
At NBS Home Loans, we have over 20 years of lending experience and are passionate about helping first-home buyers into their own homes.
If you have questions about home ownership as a First Home Buyer or want to organise an obligation-free chat contact us today on 0434 103 326.
For an up-to-date overview of the current rates on offer, visit our Facebook page at facebook.com/NBSHomeLoans