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Finding the best loan for your first home

Updated: Apr 21, 2021

You’ve saved for years, you’ve searched high and low, and you’re honing in on your dream house. Buying your first home can be an emotional and complicated process, and one aspect that can cause more angst than any other for many first home buyers is deciding on the best home loan.

There are countless lenders in the market who offer loans with different features, restrictions and benefits, so chances are there is something to suit everyone’s needs. The more you understand the features that matter to you, the better equipped you’ll be to navigate the home finance market and find the most suitable loan.

Here are a few of the key factors and decisions to consider when deciding what loan is right for you.

Should I choose a variable rate, fixed rate, or a combination?

Just as the name suggests, a fixed rate loan locks your interest rate in for a defined period of time, often between one and ten years. Fixed rates are often a point of competition between lenders and provide buyers with peace of mind that interest rates and repayment amounts are predictable and unchanging.

A variable rate loan on the other hand is subject to changes at any time by your lender, often in response to decisions made by the Reserve Bank of Australia but also by a lender themselves. Interest rates can be increased or lowered, meaning your repayment amounts will change and there is a potential of both risk and reward by riding market fluctuations.

You may also choose a combination of the two, securing a portion of your loan at a fixed rate to ensure some stability while applying a variable rate to the other, in order to take advantage of any favourable changes in interest rates.

The time and market conditions at which you buy will impact which option is more appealing, as will your acceptable level of risk and other personal factors.

Do I need an offset account?

An offset account is a savings or transaction account opened with your lender which then ‘offsets’ your loan account, with your interest calculated on the difference between the amount you owe and the amount in your offset account. It can assist you in paying your loan off faster by reducing interest payments. Generally offset accounts are only available on variable rate loans.

There are many reasons an offset account can be useful, particularly in managing your interest payments so you can pay more off the principal of your loan. However, keep in mind that they can incur additional fees or attract higher interest rates, so be aware of the conditions of your specific loan.

For more detail on offset accounts, read our article, ‘Offset vs redraw: How should I structure my home loan?’

Do I need to get pre-approval?

Pre-approval is not compulsory, but can be a valuable tool in your arsenal to give you confidence in what you’re able to spend on a home. Pre-approval, also known as conditional approval or approval in principle, essentially involves applying to a lender and receiving an indication of what you may be able to borrow.

While this is not a confirmed loan, it is a clear sign that you are prepared to buy and in a good position to secure finance when you’ve found the right property. It can also help to speed up the process of securing a loan and reduce the uncertainty and stress if you do succeed in buying a house.

Armed with a specific budget and confidence in your ability to access funds, you can house hunt with confidence.

Applying for pre-approval requires all the same documentation as applying for a loan to show your financial position, including bank statements, proof of income and details of other assets. A mortgage broker can help guide you through finding the appropriate lender and gathering all the necessary details to secure pre-approval.

Speak to a mortgage broker

There are almost as many different loans on the market as there are prospective buyers. When you’re searching for your first home, it’s important to feel confident you’ve selected a loan that suits your financial situation and lifestyle. To find out more about the options that might be available and how these best apply to your unique needs, get in touch with the BFD FInance team today to begin your house hunting journey with peace of mind.

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