Crack the Home Loan Code: Insider Tips for Purchasing Your First Home

Purchasing your first home is a monumental milestone that’s both rewarding and challenging. From deciphering confusing acronyms such as FHOG, LVR and LMI, to educating yourself on the niches of the housing market, the home buying process can feel like learning a whole new language! To help you with ‘cracking the mortgage code’ and entering the property market, our experts have put together some handy tricks and tips to improve your chances of becoming a happy first homeowner.

1. Leverage first home buyer grants and incentives.

The housing market can be a seriously tough nut to crack, and for some, near impossible without assistance. State and federal governments have developed incentives, grants, and rebates to help first home buyers enter the property market.

For instance, the Home Guarantee Scheme (HGS) is an Australian Government initiative designed to help eligible home buyers to purchase homes sooner. The HGS includes three ‘Guarantees’:

• First Home Guarantee – supports eligible first home buyers to buy a property with as little as a 5% deposit, without having to pay lenders mortgage insurance (LMI).
• Regional First Home Buyer Guarantee – supports eligible regional first home buyers to purchase a home in a regional area with as little as a 5% deposit, without having to pay LMI.
• Family Home Guarantee – supports eligible single parents with at least one dependent child to buy a home with as little as a 2% deposit, without having to pay LMI (whether they’re a first home buyer or a previous homeowner who does not currently own a home).

In July 2023, the scheme’s eligibility criteria expanded to include even more hopeful home buyers. Learn more about the scheme and the eligibility criteria here.

2. Assess your borrowing power.

It’s important to ‘do the numbers’ and work out what a lender is likely going to let you borrow and how much you can consistently afford in mortgage repayments. This calculation will help you to understand the price range of properties you can consider. Key factors that influence borrowing power include:

• Income (such as your household’s salary and if you have any dependents)
• Your loan’s term and interest rate
• Your general living expenses as well as any other additional loans, debts and ongoing financial commitments you may have.
• Your credit history (for instance, have you paid a few bills late or missed a few credit card payments in the past? An impaired credit history may adversely impact your borrowing power).

Be sure to take advantage of our Borrowing Power Calculator to get an idea of what your borrowing capacity may be. This is an estimate only, so be sure to speak to your local MoneyQuest mortgage broker regarding your circumstances for a more in-depth assessment of your borrowing power.

3. Think about Lenders Mortgage Insurance (LMI).

Lenders Mortgage Insurance, or LMI, is an insurance that lenders take out when a borrower only has a small deposit, usually less than 20% of the property’s purchase price. They do this to protect themselves in the event that a borrower can no longer make their mortgage repayments, the home has to be sold, and the home is sold for less than the outstanding loan balance.

Whilst the point of LMI is to cover the lender, the insurance premium is generally paid by the borrower.

LMI allows those without big deposits to enter the property market sooner. LMI is generally added to your loan amount and paid off via your ongoing mortgage repayments.

If you don’t want to pay LMI, be sure to save up a 20% deposit, or look into government grants and initiatives, such as the Home Guarantee Scheme mentioned above, that allows home buyers to enter the property market with as little as a 5% deposit, without having to pay LMI. Another way to avoid LMI is through a guarantor home loan. More on this below!

A common question that first home buyers ask is – should I prioritise entering the property market sooner, even if it means having to pay LMI because of a small deposit, or should I wait until I have a 20% deposit so that I don’t have to pay the LMI premium? The answer to this question depends on your individual circumstances and goals. We recommend reaching out to your local MoneyQuest mortgage broker to discuss your options so that you can make an informed decision that is right for you.

4. Get Financially fit.

This is arguably the hardest part. When purchasing a property, it’s important to be in a strong financial position that allows you to comfortably cover your mortgage repayments. This may mean changing some of your spending habits.

Lenders will also take your financial stability into account when deciding if you’re eligible for a loan, so being modest with your expenses or paying off your credit card in the lead up to applying for a home loan can only improve your chances. For instance, consider cutting back to just one TV streaming service, eat at home more often rather than regularly dining out, or set yourself a challenge of only purchasing the absolute necessities for a month.

To prepare for the home loan process and to put yourself in a strong borrowing position, you can also request a copy of your credit history from a credit reporting agency, to identify any areas that need improving prior to lodging your application. This is one of the documents a lender will look at when deciding if you’re a responsible borrower and can afford the mortgage.

5. Secure pre-approval.

Pre-approval (sometimes referred to as approval in principle or conditional pre-approval) is a dollar amount indication from your lender regarding how much you may be eligible to borrow, subject to certain conditions. The lender provides this indication after assessing a range of factors such as your employment status, income, credit history, assets, ongoing financial commitments and debts.

The amount you’re pre-approved for will help you to set some budget parameters and help you to refine your property search. Whilst it isn’t a guarantee that your loan application will be formally approved, it provides you with a fair idea of your borrowing capacity and allows you to bid at auction or make an offer at private sale with some form of confidence. Pre-approvals are generally valid for three to six months, depending on your chosen lender.

Your MoneyQuest mortgage broker can walk you through the pre-approval process and submit the pre-approval application for you.

6. Define your property preference.

With all the discussion around borrowing power, credit scores, government grants, and loan-to-value ratios, it’s easy to forget that buying a home is supposed to be an exciting journey! Your first home may be where you live for years, so it’s important to find a property that you love and feel comfortable in. Once you have your pre-approval sorted, you can look for a home with a bit more confidence and clarity. But it’s wise to do some research and deep thinking before you start.

Make a list of property feature and location preferences, and consider factors like the property’s potential re-sale value, its proximity to things like schools, public transport and shops, and ask yourself – what are my deal-breakers and what house features can I compromise on?

Knowing what you want and how much you can potentially afford will make the search a lot easier. Remember, location often plays a big part in the cost of a property. Check out our list of growing areas in Australia here.

7. Don’t be afraid to ask for help.

The help of a mortgage broker can make all the difference when securing a home loan. They can guide you through the lending process, calculate your borrowing capacity, inform you of the government grants and loan products available, and communicate with lenders on your behalf to better your chances of getting the loan that suits your needs. Best of all, MoneyQuest mortgage brokers’ services come at no cost to you, meaning you have nothing to lose by booking a chat.

It can also be useful to engage the help of other experts, such as a conveyancer or a solicitor to handle the legal side of the transaction, a buyer’s advocate if you don’t have time to do the property research yourself, and/or a building and pest inspector to assess the property’s condition in terms of infestations, defects and safety hazards.

You may also like to consider reaching out to your parents if they’re in a position to provide support. If you’re not keen on making a withdrawal from ‘the bank of mum and dad’, another option is asking them to be guarantors. A guarantor on a mortgage offers part of their home equity as security for your loan, to help top up your deposit to at least 20%. No money changes hands with this guarantee and it allows you to avoid paying LMI. But if you go down this route, be sure to stay on top of your repayments, otherwise the lender will ask your guarantor to make the repayments and you’ll get the scolding of a lifetime!

Purchasing your first property might seem daunting, but with a bit of preparation, the right knowledge and the right professionals in your corner, you can navigate the process successfully. Leverage grants and incentives where possible, have your borrowing capacity assessed, weigh up LMI, and fine tune your finances to make your homeownership dream a reality. Remember, you don’t have to embark on this journey alone!

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