Finance deals for first home buyers

Finance deals for first home buyers
Jessie RichardsonDecember 7, 2020

First home buyers are often working with a different set of requirements than more experienced investors.

With fewer working years behind them, beginners are likely to have a smaller deposit to work with and fewer assets than upgraders or downsizers - and much less experience.

Financing is a large part - perhaps the largest part - of securing your own home, and many lenders are aware of the circumstances facing first home buyers.

Once upon a time, the Rudd government introduced First Home Savers Accounts, where savers could receive a government co-contribution of up to $1,020 on the first $6000 savers deposited each year. They were also eligible for a range of tax concessions, but were faced with a number of restrictions on when they could withdraw their money.

The First Home Saver Account scheme was scrapped by the Abbott government this year, leaving some confused as to whether the restrictions still apply to their accounts. While ME Bank have suggested they may offer a similar product in the future, it has not yet eventuated.

Now, with no federal scheme supporting first home savers, it's up to them to seek out the best deals from lenders to finance their first purchase.

Lenders Mortgage Insurance

One option is seeking out a lender that will accept a small deposit. When putting down a deposit lower than the standard 20%, many lenders will require you to pay for lenders mortgage insurance (LMI), which will protect them against a loss should you default on your home. This isn't a product that is unique to first home buyers, but can be used by buyers across the board who don't want to make a 20% deposit.

While it might be tempting to put down a 5% or 10% deposit and pay the few thousand dollars for LMI, keep in mind that you're not exchanging money for equity in your home (as you would be if you increased your deposit size) and the money cannot be recovered when you sell your house.

Beyond grants, it's mostly up to mortgage brokers and lenders to deliver products that may make life easier for first home buyers. Here are some of the available options.

Guarantors

While some parents don't want to contribute money to their child's deposit, they can support a first purchase by acting as a guarantor. A guarantor has a legal obligation to pay back a loan if the borrower (often their child) can't continue making their repayments. Occasionally, a lender will require a guarantor to use their home or a large asset as security for a loan. Sometimes guarantors can set a limit on the amount they'll contribute to a loan.

With a guarantor, a first home buyer making a 10% deposit can often forgo or reduce LMI. A number of different lenders accept guarantors - Beyond Bank has a "Parent Equity" scheme, while St George refers to the practice as a "Family Pledge".

While guarantees are often associated with parents, some lenders accept friends as guarantors. Resolve Finance offers guarantor home loans where a friend or family members use the equity in their own homes to guarantee a loan, allowing borrowers to go without a deposit.

While guarantors sound good, beware. If there is any doubt over your ability to repay your loan, you could end up costing your guarantor their home or retirement savings.

First home buyer packages

A number of lenders offer first home buyer "packages" or specialist products. The discounts or benefits they offer vary (as does their value).

Commonwealth Bank offers a $1,000 cash bonus on your first loan, which could be straightforward and appealing to some.

In South Australia, first home savers using Home Start Finance can make a deposit as low as 3% of the value of your loan, and the First Home Owner Grant is included in deposit calculations.

Meanwhile, bankmecu offers a first home buyers loan package where borrowers can pay $350 per year in exchange for lower rates, three months free building insurance during settlement, 10% off  general insurance premiums and no monthly or additional repayment fees, subject to certain conditions.

Other lenders, such as the North Ireland Credit Union, get even more creative, with furniture vouchers and credit card incentives.

If you are considering a first home buyer package, go in with open eyes and take some time to do your calculations. Think about what's valuable to you - would you prefer to pay a set fee every year for the possibility of lower rates? This could be a worthwhile option, but only if the saving in interest is greater than your yearly fee. Don't simply take up first home buyer packages because they look good superficially, but consider as many loan options as you can.

In deals not exclusive to first home buyers, lenders are also offering record low rates: ME Bank currently offers a 4.94% rate on their three year fixed rate loan. However, bear in mind that added flexibility offered by a variable loan.

Take the time to look at the short-term incentives available, but don't forget - buying a home is a long-term commitment.

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