Buying your first home? Here are four things you need to watch out for

Buying your first home? Here are four things you need to watch out for

A growing number of first home buyers are rushing to join the property market, lured in by historically low rates. But they may not be looking at the whole picture.

New data from the Real Estate Institute of Australia (REIA)’s Housing Affordability Report, for the September quarter 2019, recorded the highest percentage of first home buyers entering the Australian marketplace in eight years.

REIA President Adrian Kelly said: “Although the average loan amount has risen, the increase in family income and the decrease in the interest rates have negated this rise.”

As a result of three Reserve Bank of Australia cash rate cuts in 2019, Australian borrowers have seen home loan rates plummet to record lows.

Lenders have also reduced their serviceability floors in response to lower market rates. Easing back on this part of the home loan assessment means would-be borrowers may find getting a home loan is a little easier. Plus, they may now be able to borrow thousands more.

These changes may have worked to create an ideal setting for first home buyers to take a bigger piece of the home loan pie. However, there are a few risks that first home borrowers should consider before they leap into this new mortgage environment.

First home buyer growth in Australia

In the September 2019 quarter, the number of new loans to first home buyers grew by 9,270 (13.6 per cent), and 6.8 per cent over the year.

According to REIA data, 29.4 per cent of all new loans in the September quarter (excluding refinancing) were to first home buyers, the highest percentage since December 2011.

State-based first home buyer figures

State Number of new FHB loans

(Sept. 2019 quarter)

Increase over Sept. 2019 quarter Increase from Sept. ‘19 quarter – Sept. ’18 quarter
New South Wales 8,246 20.6% 15.3%
Victoria 9,395 10.2% 9.0%
Queensland 5,589 16.8% 6.9%
South Australia 1,547 -2.7% 4.4%
Western Australia 3,817 9.9% 6.3%
Tasmania 502 1.4% 3.7%
Northern Territory 218 -20.4% 6.9%
Australian Capital Territory 662 61.1% 24.9%

Source: REIA Housing Affordability Report, September 2019 quarter.

The risks first home borrowers face

While taking advantage of low rates and easier loan assessment criteria can be beneficial, it’s important for first home buyers to be aware of the potential home loan traps.

1. Can you afford a 3 per cent rate increase?

Home loan rates are low now, but they could increase one day. Before applying for any home loan, it’s recommended you calculate whether you can afford a potential 3 per cent increase on your mortgage rates.

For example, a $500,000 30-year home loan on a rate of 3.20 per cent (excluding fees) would only cost $2,162 in monthly repayments. A hypothetical rate increase of 3 per cent to 6.20 per cent would see mortgage repayments shoot up to $3,062 per month. This is an increase of $900 a month could see the unprepared fall into mortgage stress.

Before applying for a home loan, consider if a 3 per cent rate increase is something you could afford with your current household income.

2. Low rates but high fees

A common trap that borrowers can fall into is not looking at the fees associated with their home loan. Low advertised rates on a home loan can often mean you will be charged higher than average fees for other services. This is why it’s valuable to look at a home loan’s comparison rate, not just its advertised rate.

Comparison rates were introduced in response to lenders advertising low rate loans to attract customers. The loan would end up costing more due to high upfront and ongoing fees, so these comparison rates provide an ‘accurate’ view of what a loan may really cost you.

You might be able to skip some fees altogether, if you do your research. According to RateCity data, the average application fee is $570 and the average ongoing fee is $257. However, 47 per cent of home loans in the RateCity database don’t charge application fees and 53 per cent don’t charge any ongoing fees.

  • It’s also valuable to get a Key Facts and Figures Sheet from your lender, to be sure you are aware of all fees associated with the loan.

3. ‘Honeymoon’ rates with a sting in their tail

Introductory, or ‘honeymoon’ rates are the name of special low interest rates applied to new loans for an initial period of time, usually 6 – 12 months. After this introductory term, the rate then reverts to the (generally higher) standard variable rate.

These types of rates are designed to attract new borrowers to banks. You may feel a bit of breathing room in the first year, but you run the risk of paying higher repayment amounts than you can afford once the introductory term ends.

First home buyers should do their homework before choosing any home loan. Keep an eye out for the comparison rates with introductory loans. If it’s significantly higher than the advertised rate, there may be a costly catch.

4. Sticking with your childhood bank

You wouldn’t buy a house without doing the research first, such as looking into the neighbourhood or comparing prices of other houses sold on the street. So why don’t we do the same for home loan providers?

Getting a home loan with the bank you’ve been with since you were a kid is often the option that takes the least effort, but it may not be the best option for you.

In fact, you could miss out on some serious savings by not shopping around.

Get a low rate home loan that works for you

According to RateCity research, owner-occupier principal and interest home loan rate is 3.75 per cent and the average variable investor principal and interest home loan rate is 4.13 per cent.

If you’re considering a home loan with a much higher rate than the rates above, you might want to consider checking out smaller lenders with more competitive rates.

Here is a list of the current lowest rate loans on the RateCity marketplace:

Low rate owner-occupier loans

Lender Home loan Advertised rate Comparison rate
Reduce Home Loans Low Rider Home Loan

2.69

2.71

Homestar Finance Star Essentials Home Loan

2.74

2.77

Freedom Lend Freedom Variable Home Loan

2.79

2.79

G&C Mutual Bank First Home Premium Package

2.79

2.79

Pacific Mortgage Group Standard Variable Home Loan

2.79

2.79

Note: Data accurate as at 5 December 2019. Figures based on 30-year home loan under $1 million, paying principal and interest.

Low rate investor loans

Lender Home loan Advertised rate Comparison rate
Reduce Home Loans Rate Slasher Variable Investment Loan

2.99

3.01

Freedom Lend Freedom Variable Investment Loan

3.09

3.09

Pacific Mortgage Group Standard Variable Investment Loan

3.09

3.09

Well Home Loans Well Balanced Investment Loan

3.12

3.16

Homestar Finance Variable Rate Investment Loan

3.14

3.17

Note: Data accurate as at 5 December 2019. Figures based on 30-year home loan under $1 million, paying principal and interest.

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Learn more about home loans

Does the Home Loan Rate Promise apply to discounted interest rate offers, such as honeymoon rates?

No. Temporary discounts to home loan interest rates will expire after a limited time, so they aren’t valid for comparing home loans as part of the Home Loan Rate Promise.

However, if your home loan has been discounted from the lender’s standard rate on a permanent basis, you can check if we can find an even lower rate that could apply to you.

Can first home buyers apply for an ING home loan?

First home buyers can apply for an ING home loan, but first, they need to select the most suitable home loan product and calculate the initial deposit on their home loan. 

First-time buyers can also use ING’s online tool to estimate the amount they can borrow. ING offers home loan applicants a free property report to look up property value estimates. 

First home loan applicants struggling to understand the terms used may consider looking up ING’s first home buyer guide. Once the home buyer is ready to apply for the loan, they can complete an online application or call ING at 1800 100 258 during regular business hours.

How do I apply for a home improvement loan?

When you want to renovate your home, you may need to take out a loan to cover the costs. You could apply for a home improvement loan, which is a personal loan that you use to cover the costs of your home renovations. There is no difference between applying for this type of home improvement loan and applying for a standard personal loan. It would be best to check and compare the features, fees and details of the loan before applying. 

Besides taking out a home improvement loan, you could also:

  1. Use the equity in your house: Equity is the difference between your property’s value and the amount you still owe on your home loan. You may be able to access this equity by refinancing your home loan and then using it to finance your home improvement.  Speak with your lender or a mortgage broker about accessing your equity.
  2. Utilise the redraw facility of your home loan: Check whether the existing home loan has a redraw facility. A redraw facility allows you to access additional funds you’ve repaid into your home loan. Some lenders offer this on variable rate home loans but not on fixed. If this option is available to you, contact your lender to discuss how to access it.
  3. Apply for a construction loan: A construction loan is typically used when constructing a new property but can also be used as a home renovation loan. You may find that a construction loan is a suitable option as it enables you to draw funds as your renovation project progresses. You can compare construction home loans online or speak to a mortgage broker about taking out such a loan.
  4. Look into government grants: Check whether there are any government grants offered when you need the funds and whether you qualify. Initiatives like the HomeBuilder Grant were offered by the Federal Government for a limited period until April 2021. They could help fund your renovations either in full or just partially.  

What are the different types of home loan interest rates?

A home loan interest rate is used to calculate how much you’ll pay the lender, usually annually, above the amount you borrow. It’s what the lenders charge you for them lending you money and will impact the total amount you’ll pay over the life of your home loan. 

Having understood what are home loan rates in general, here are the two types you usually have with a home loan:

Fixed rates

These interest rates remain constant for a specific period and are a good option if you’re a first-time buyer or if you’re looking for a fixed monthly repayment. One possible downside of a fixed rate is that it may be higher than a variable rate. Also, you don’t benefit from any lowering of interest rates in the market. On the flip side, if rates go up, your rate won’t change, possibly saving you money.

Variable rates

With variable interest rates, the lender can change them at any time. This change can be based on economic conditions or other reasons. Changes in interest rates could be beneficial if your monthly repayment decreases but can be a problem if it increases. Variable interest rates offer several other benefits often not available with fixed rate home loans like redraw and offset facilities and free extra repayments. 

How do you determine which home loan rates/products I’m shown?

When you check your home loan rate, you’ll supply some basic information about your current loan, including the amount owing on your mortgage and your current interest rate.

We’ll compare this information to the home loan options in the RateCity database and show you which home loan products you may be eligible to apply for.

 

What happens to my home loan when interest rates rise?

If you are on a variable rate home loan, every so often your rate will be subject to increases and decreases. Rate changes are determined by your lender, not the Reserve Bank of Australia, however often when the RBA changes the cash rate, a number of banks will follow suit, at least to some extent. You can use RateCity cash rate to check how the latest interest rate change affected your mortgage interest rate.

When your rate rises, you will be required to pay your bank more each month in mortgage repayments. Similarly, if your interest rate is cut, then your monthly repayments will decrease. Your lender will notify you of what your new repayments will be, although you can do the calculations yourself, and compare other home loan rates using our mortgage calculator.

There is no way of conclusively predicting when interest rates will go up or down on home loans so if you prefer a more stable approach consider opting for a fixed rate loan.

What is the Home Loan Rate Promise?

The Home Loan Rate Promise is RateCity putting its money where its mouth is. We believe that too many Australians are paying too much for their home loans. We’re so confident we can help Aussies save money, if we can’t beat your current rate, we’ll give you a $100 gift card.*

There are two reasons it pays to check your rate with the Home Loan Rate Promise:

  • You can find out how much you could save on your home loan by switching to a loan with a lower interest rate
  • If we can’t beat your current rate, you can claim a $100 gift card with our Home Loan Rate Promise*

How do I apply for Westpac’s first home buyer loan?

If you’re a first home buyer looking to apply for a home loan with Westpac, they offer an online home loan application. They suggest the application can be completed in about 20 minutes. Based on the information you provide, Westpac will advise you the amount you can borrow and the costs associated with any possible home loan. 

You can use Westpac’s online mortgage calculators to estimate your borrowing power. You can also work out the time it might take to save up for the deposit, and the size of your home loan repayments

When applying for a home loan with Westpac, you’re assigned a home finance manager who can address your concerns and provide information. The manager will also offer guidance on any government grants you may be eligible for. 

How can I apply for a first home buyers loan with Commonwealth Bank?

Getting a home loan requires planning and research. If you are considering a home loan with the Commonwealth Bank, you can find the information you need in the buying your first home section of the bank’s website.

You can see the steps you should take before applying for the loan and use the calculators to work out how much you can borrow, what your monthly repayments would be and the upfront costs you’d likely pay.

You can also book a time with a Commonwealth first home loan specialist by calling 13 2221.

CommBank publishes a property report that may help you understand the real estate market. The bank has also created a CommBank Property App that you can use to search for property.  The link to download this app is available on the same webpage.

If you are eligible for the First Home Loan Deposit Scheme, CommBank will help you process your application. The scheme helps first home buyers to purchase a home with a low deposit. You can read details about this scheme here and speak with a CommBank home lending specialist to understand your options.

What is a variable home loan?

A variable rate home loan is one where the interest rate can and will change over the course of your loan. The rate is determined by your lender, not the Reserve Bank of Australia, so while the cash rate might go down, your bank may decide not to follow suit, although they do broadly follow market conditions. One of the upsides of variable rates is that they are typically more flexible than their fixed rate counterparts which means that a lot of these products will let you make extra repayments and offer features such as offset accounts.

How much deposit do I need for a home loan from ANZ?

Like other mortgage lenders, ANZ often prefers a home loan deposit of 20 per cent or more of the property value when you’re applying for a home loan. It may be possible to get a home loan with a smaller deposit of 10 per cent or even 5 per cent, but there are a few reasons to consider saving a larger deposit if possible:

  • A larger deposit tells a lender that you’re a great saver, which could help increase the chances of your home loan application getting approved.
  • The more money you pay as a deposit, the less you’ll have to borrow in your home loan. This could mean paying off your loan sooner, and being charged less total interest.
  • If your deposit is less than 20 per cent of the property value, you might incur additional costs, such as Lenders Mortgage Insurance (LMI).

Can I take a personal loan after a home loan?

Are you struggling to pay the deposit for your dream home? A personal loan can help you pay the deposit. The question that may arise in your mind is can I take a home loan after a personal loan, or can you take a personal loan at the same time as a home loan, as it is. The answer is that, yes, provided you can meet the general eligibility criteria for both a personal loan and a home loan, your application should be approved. Those eligibility criteria may include:

  • Higher-income to show repayment capability for both the loans
  • Clear credit history with no delays in bill payments or defaults on debts
  • Zero or minimal current outstanding debt
  • Some amount of savings
  • Proven rent history will be positively perceived by the lenders

A personal loan after or during a home loan may impact serviceability, however, as the numbers can seriously add up. Every loan you avail of increases your monthly installments and the amount you use to repay the personal loan will be considered to lower the money available for the repayment of your home loan.

As to whether you can get a personal loan after your home loan, the answer is a very likely "yes", though it does come with a caveat: as long as you can show sufficient income to repay both the loans on time, you should be able to get that personal loan approved. A personal loan can also help to improve your credit score showing financial discipline and responsibility, which may benefit you with more favorable terms for your home loan.

What is a comparison rate?

The comparison rate is a more inclusive way of comparing home loans that factors in not only on the interest rate but also the majority of upfront and ongoing charges that add to the total cost of a home loan.

The rate is calculated using an industry-wide formula based on a $150,000 loan over a 25-year period and includes things like revert rates after an introductory or fixed rate period, application fees and monthly account keeping fees.

In Australia, all lenders are required by law to publish the comparison rate alongside their advertised rate so people can compare products easily.

How do I refinance my home loan?

Refinancing your home loan can involve a bit of paperwork but if you are moving on to a lower rate, it can save you thousands of dollars in the long-run. The first step is finding another loan on the market that you think will save you money over time or offer features that your current loan does not have. Once you have selected a couple of loans you are interested in, compare them with your current loan to see if you will save money in the long term on interest rates and fees. Remember to factor in any break fees and set up fees when assessing the cost of switching.

Once you have decided on a new loan it is simply a matter of contacting your existing and future lender to get the new loan set up. Beware that some lenders will revert your loan back to a 25 or 30 year term when you refinance which may mean initial lower repayments but may cost you more in the long run.