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Which bank is best for first home loans?

Mark Bristow avatar
Mark Bristow
- 6 min read
Which bank is best for first home loans?

Because a home loan is a major financial commitment, it makes sense to look for the best possible option for your first mortgage. To find the best mortgage lender for your needs, you may need to look beyond just the interest rates and consider each lender’s features and benefits, including their customer service.

Every borrower’s financial situation and personal goals are different, so there is no one-size-fits all best mortgage for first home buyers, and no best bank or lender either.

Some home loan features and benefits may be particularly appealing to first home buyers, such as:

Low interest rates

The interest rate is used to calculate the interest charged on your home loan repayments. The higher the rate, the more your mortgage repayments may cost, so the interest rate is often the first thing a borrower checks when comparing home loans.

Keep in mind that as a first home buyer, it may not be easy to qualify home loans with some of the lowest rates. Low-rate home loans often have strict eligibility criteria, such as requiring a larger than average deposit or a high income compared to your expenses, which may be challenging for some first home buyers to fulfil. 

Most Australian home loans have variable interest rates, which may rise or fall over the loan term based on various economic factors, such as changes to the national cash rate set by the Reserve Bank of Australia (RBA). Alternatively, you may be able to apply for a home loan with a fixed rate, which is locked in for a limited time, often from 1 to 5 years. 

Some first home buyers may appreciate that a fixed interest rate keeps their repayments consistent, for simpler budgeting. Even if rates rise, you’ll still be making the same mortgage repayments. However, the fixed rate you’re offered may start out higher than some variable rate deals, and if rates were to fall during the fixed rate period, you’d be stuck making the higher repayments. Plus, fixed rates are only temporary, and when the fixed term expires you’ll revert to a variable rate, which could lead to mortgage stress if rates have risen in the meantime.

Low deposit

The high price of property in Australia, especially in the capital cities, means that even first home buyers who could comfortably afford mortgage repayments may still struggle to save up the deposit required to apply for a home loan.

Most lenders prefer a home loan deposit of at least 20 per cent of the property’s value. Saving up this sum may take more time and effort than is practical, even if you access extra support such as the first home owners grant in your state or territory.

Some lenders will let you apply with a smaller deposit of 10 or even 5 per cent of the property value. However, because lenders consider these loans to be riskier, they’ll take out a Lenders Mortgage Insurance (LMI) policy to cover them (and not you) if you default on your repayments. Most lenders will pass the cost of LMI on to the borrower – the lower your deposit, the higher the cost of LMI.

Guarantor 

One alternative to paying LMI charges when buying your first home with a low deposit is to ask a family member to guarantee your loan using the equity in their own property. This could supplement or even replace a traditional deposit, potentially allowing you to buy your first home without saving a deposit.

However, not all mortgage lenders will accept applications supported by a guarantor. Also, strict eligibility criteria would likely apply both for the borrower and the guarantor.

Guaranteeing a home loan can put the guarantor’s finances at risk, as they’d become responsible for your loan if you were to default. And not every first home buyer will have the option to have a home-owning parent or grandparent guarantee their loan.

Access to government support programs 

Australia’s state and federal governments offer support programs to help first home buyers purchase property. For example, the federal Home Guarantee Scheme allows a borrower to buy a property with a deposit as small as 5 per cent and pay no LMI, as the government will act as your guarantor.

However, there are terms and conditions to this program around what kind of properties you can buy and in what area. Also, not all mortgage lenders participate in the scheme, so you may not get to borrow from your preferred lender.

State and territory governments may also offer their own support programs for first home buyers, such as co-ownership schemes, first home owner grants, or stamp duty discounts or exemptions. Check your state or territory government’s website for more details.

Cashbacks and special offers 

Some mortgage lenders try to attract new customers by offering low rates and fees, while others offer special rewards such as cashback deals. Many of these offers are aimed at existing homeowners looking to refinance their mortgage, but some are available to first home buyers. 

For example, some lenders may offer to waive your LMI charges if you apply with a deposit of 15 per cent and you fulfil other terms and conditions.

Choosing the best mortgage lender for you 

There are plenty more home loans features and benefits to consider when comparing home loan deals. The best mortgage option for you will depend on your financial situation and your personal goals.

Similarly, the best mortgage lender for you may depend on what they offer compared to what you need. For example, big banks may offer a wide range of financial services, such as bundling your mortgage with a transaction account and credit card, but may not always offer the cheapest deals.

Smaller competitor lenders may be willing to offer lower rates and fees, but may not offer as many special features, bells and whistles as the bigger banks. And while an online-only lender may be fine for a first home buyer that prefers to look after their money online or over the phone, you won’t have access to a branch network in case you need to meet with a loan officer in person.

The speed and quality of a bank’s customer service may also be a factor to consider when comparing your options. This can make a big difference to your quality of life if you ever need to make complex changes to your loan. And a lender that can quickly process a mortgage application and offer pre-approval faster may be able to help you buy your first home that little bit sooner.

A mortgage broker may be able to help you compare home loans, work out which lenders best suit your needs, and walk you through the application process for buying your first home.

Compare home loans in Australia

Product database updated 19 May, 2024

This article was reviewed by Personal Finance Editor Alex Ritchie before it was published as part of RateCity's Fact Check process.