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How to buy your first home

Alex Ritchie avatar
Alex Ritchie
- 10 min read
How to buy your first home

Ready to take the step from renter to homeowner? It’s one of the biggest financial commitments you may ever make, so it’s important to get an understanding of the process involved before taking the plunge. 

While the way you will save up for your deposit or pay off your mortgage will differ for every individual, the general process of applying for a home loan and purchasing a property is universal.  

Generally, you can expect to go through the following steps when buying your first home:

  1. Save a deposit
  2. Apply for relevant grants, schemes or incentives
  3. Assess your financial health
  4. Compare home loan options
  5. Apply for pre-approval
  6. Choose a property and make an offer
  7. Apply for full approval
  8. Settlement

Let’s explore the steps you may need to take to buy your first home.

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Steps for purchasing your first home

Step one – Save a deposit 

This first step is one of the hardest for a lot of first home buyers, as saving even a small deposit of 5% can be a big ask when property values in popular areas are high. Also, if your deposit is less than 20%, you’ll also have to budget for Lenders Mortgage Insurance (LMI), which can be another significant upfront cost. 

While you may be able to make up part of your deposit from gifts, inheritances, or by selling other expensive assets, most lenders will want to see proof that most of your deposit is made up of ‘genuine savings’ – in other words, money saved up over time.

One option you could consider for saving a deposit is to take advantage of the First Home Super Saver Scheme, where you can make extra voluntary deposits into your super fund, so you can be sure the money won’t get spent elsewhere, then access these funds to help make up your first home deposit.  

If it’s looking like you’ll struggle to pay both a house deposit and LMI, you may be able to ask someone to guarantee the deposit on your home loan. This involves a close family member (typically your parents) using the equity in their own property in place of your deposit, allowing you to avoid paying LMI charges, and potentially even allowing you to get a no-deposit home loan. So, if you were only able to save a 5% deposit, your parents could guarantee the remaining 15% so that when you apply for a home loan, you’ll have a 20% deposit.

However, if you default on your mortgage repayments, your guarantor will become responsible for your home loan, which can make a significant impact on not just their finances, but your relationship. It’s important that all of the parties involved are aware of their rights and responsibilities before signing on any dotted lines.

Of course, this option may not be available to every borrower, as not every borrower will have a close relative with enough equity in a property available to help secure a home loan.

Step two – Grants, incentives, and support schemes

The state and federal governments offer a wide variety of options to encourage renters to become first home buyers. These include:

  • Home Guarantee Scheme (HGS): A federal government program that allows eligible borrowers to buy or build a property with a 5% deposit and pay no LMI, as the government will guarantee up to 15%. Keep in mind that eligibility criteria applies and there are a limited number of places in the scheme each year
  • Family Home Guarantee:A variant of the HGS that allows single parents to buy their first home with a deposit as small as 2%
  • Regional Home Guarantee: A variant of the HGS specifically for building or buying a property in Australia’s regional areas.
  • First Home Owner Grants (FHOGs): Offered by state/territory governments, these can add a significant sum to your deposit.
  • Stamp duty discount and waivers: State and territory governments may discount or waive stamp duty for first home buyers.

Keep in mind that most of these grants and schemes will require you to fulfil eligibility criteria and other terms and conditions. For example, many first home buyer schemes require you to be purchasing your first home as an owner occupier, meaning you won’t be able to use them to purchase an investment property.

Step three – Assess your financial health

When you apply for a home loan, a lender will be looking for stability and low risk in your application. Before you take the plunge and purchase your home it may be worthwhile assessing your financial health and working to boost it - if needed.  

This may include:

  • Improve your credit score - Lenders will generally favour borrowers with good to excellent credit scores. Grab a copy of your credit scores, and if they are not as high as you expected, take time to improve your credit history and credit scores. 
  • Pay off your debts - you may want to consider paying off your existing debts before applying for a home loan as this may boost your borrowing power.
  • Cut out discretionary spending - Lenders will categorise your spending when they go through your bank statements in your application. If you constantly pay for takeaway meals or have an online shopping habit, consider cutting this out for three months leading up to your application to boost your borrowing power. 
  • Stable employment - Lenders also look at stability in your income and employment when assessing your application. Being employed for 12 months in a full-time role is considered ideal. If you’ve been offered a new role - even if it pays more - it may be worthwhile waiting until you’ve ended your probation period (3-6 months) before you apply. 

It’s also crucial that you look at your income and expenses to estimate whether you’ll be able to actually afford the repayments on a home loan.  

The more you earn and the less you spend, the more borrowing power you may have. If more than one third of your household income will go toward servicing your mortgage, you may be considered at risk of ending up in mortgage stress

Keep in mind that there may also be other costs to consider when buying a property, such as stamp duty (though this may be waived for first home buyers), conveyancing fees, pest inspections and more.

Step four – Compare home loan options

You’ve saved up a deposit and your finances are in check. Now is the time to start comparing your home loan options. 

You may be tempted to just apply for a home loan with your childhood bank, but you could risk paying tens of thousands of dollars more in interest charges just by being loyal to one lender. There may be far more competitive home loan offers available if you simply take the time to look around.

RateCity makes the comparison process easy through our handy comparison tables. Simply, enter your loan details, such as the loan amount you want and the deposit amount you’ve saved, and you’ll be shown a range of options side by side. This allows you to easily compare apples with apples, seeing the different interest rates and repayment amounts with each loan.

You can even filter down your options further if you want to prioritise features like an offset account, or really just want a big four bank loan. Then, you can create a short list of potential home loan options and determine which one is the best for your financial situation and goals. 

Step five – Apply for pre-approval

Now it is time to apply with a lender. Typically, this is where a first home buyer will seek pre-approval. Pre-approval does not guarantee full loan approval, but it will give you an indication of how much you could be approved to borrow, and how much you can spend at the auction. 

When you apply for a home loan, the lender will require you to provide proof of your income and expenses, such as payslips, bank statements, and more. Based on this information, they’ll work out the maximum amount they’ll be willing to lend you, taking into account the risk that your circumstances could change in the future.

If everything checks out in your application, the lender may offer you pre-approval for a limited time, often around 90 days. Receiving pre-approval gives you a maximum budget to keep in mind when making offers on properties, whether at auction or via private sale. 

Just remember that pre-approval is not the same as final approval – you or the lender may walk away from the deal.

Step six – Choose a property and make an offer

Now comes the fun part - shopping around for your first home! Whether you’re looking for a family home to live in, or your first investment property, it’s important to consider if the property will fulfil your household’s needs, now and in the future.  

Keep your budget in mind when shopping for property, so you don’t accidentally agree to pay more than you can afford, whether you plan to buy the property at auction or via private sale. 

Five key things to consider when purchasing your first home are:

  1. Your budget -  Can you afford the home? Does it need repairs or is it a turn-key home?
  2. Your must-haves - Does it have enough bedrooms? Do you need a garage?
  3. Your location preferences - Is it in walking distance to public transportation or parks?
  4. Government grant eligibility - Will you qualify for the schemes and grants listed above?
  5. Your home loan needs - Will you be stretched too thin if rates rise?

Step seven – Apply for full approval

Before your lender will hand over the money you need to buy the property, they’ll first have to conduct a valuation to confirm how much the property is worth. This is used to work out the loan to value ratio (LVR) – in other words, how much you’re borrowing compared to how much the property is worth.

If the valuation comes up short, and you’d be borrowing more than the lender is comfortable offering compared to the property price, you may not receive final approval on your mortgage. You may need to find other financing solutions if you want to keep the house. 

This is why it is crucial you get your financial health in order before you apply for full home loan approval. 

Step eight – Settlement 

The final step of buying your first home is waiting for settlement. Settlement is the process in which your bank or lender will pay the seller the remaining sale price (minus your deposit) and you will become the legal owner of the property. Settlement typically takes around six weeks after the Contract of Sale is exchanged and signed. 

This waiting period can be frustrating, but it is in your best interest and the seller to ensure they’ve crossed their t’s and dotted their i’s before they follow through. Once settlement has happened, you will become the legal homeowner.  

Once everything checks out and your property purchase settles, you are now a home owner! You can move in and start making your mortgage repayments

Keep in mind that there are many more small details and steps when buying a property than can be easily covered here. Property professionals such as real estate agents, mortgage brokers, conveyancers and solicitors may be able to fill the gaps and answer any specific questions you may have.  

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Product database updated 20 Jun, 2024

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