Beginner's Guide to Your First Home Loan

Preparing to apply for your first home loan means understanding deposit thresholds, pre-approval timing, and the loan structures available to owner-occupiers.

How Much Deposit Do You Need for a First Home Loan?

Most lenders require a deposit of at least 20% of the property value to avoid Lenders Mortgage Insurance. LMI applies to residential loans where the loan-to-value ratio exceeds 80 per cent, and the premium is calculated on the loan amount and LVR. Buyers who can provide a 20% deposit avoid this cost and typically access a wider range of loan products.

For buyers unable to save a 20% deposit, the Australian Government 5% Deposit Scheme enables eligible first home buyers to purchase with a deposit of as little as 5% of the property value. Housing Australia provides a guarantee to the participating lender, allowing borrowers to reach a combined deposit and guarantee of 20% without paying LMI. No income caps apply, and no annual place limits apply. Applications are made through a panel of participating lenders.

In Victoria, the property price cap is $950,000 in capital cities and regional centres and $650,000 in other areas. Both the purchase price and the lender's assessed value must be at or below the applicable cap. Box Hill falls within the Melbourne metropolitan area and is subject to the $950,000 cap.

Buyers purchasing in Box Hill under this scheme would typically be looking at units or older houses in suburbs adjacent to the main shopping district. The scheme supports both variable rate and split loan structures, depending on the participating lender.

Pre-Approval: When to Apply and What It Covers

Pre-approval confirms how much a lender is willing to lend before you sign a purchase contract. Most pre-approvals are valid for 90 days, though some lenders offer 120-day terms.

Applying for home loan pre-approval before attending auctions or making offers gives you clarity on your borrowing capacity and signals to vendors that your finance is in order. Lenders assess your income, expenses, liabilities, and credit history, then provide a conditional approval subject to valuation and final documentation.

Pre-approval does not lock in an interest rate. If rates change between pre-approval and settlement, the lender applies the current rate unless you choose a fixed rate product at the time of formal approval.

Variable, Fixed, or Split: Choosing Your Loan Structure

A variable rate home loan allows your interest rate to move in line with market conditions. When the Reserve Bank adjusts the cash rate, lenders typically pass on changes within days or weeks. Variable rate loans usually offer features such as offset accounts, redraw facilities, and the ability to make extra repayments without penalty.

A fixed rate home loan locks in your interest rate for a set period, typically one to five years. Your repayments remain constant during the fixed period, regardless of market movements. Most fixed rate products restrict extra repayments to a set annual limit, and break costs apply if you exit the loan early.

A split loan divides your loan amount between fixed and variable portions. Consider a buyer who borrows $600,000 and fixes $400,000 at a rate of 5.89% for three years, leaving $200,000 on a variable rate of 6.19%. The buyer gains partial protection from rate rises while retaining access to offset and redraw features on the variable portion. If rates fall, the variable portion benefits immediately.

Split loans suit buyers who want some certainty around repayments but do not want to commit their entire loan to a fixed rate. The proportions can be adjusted to suit individual preferences.

Stamp Duty Relief and First Home Owner Grants in Victoria

Stamp duty relief is available for first home buyers through a full exemption on properties valued up to $600,000 and a sliding scale concession on properties valued between $600,001 and $750,000. The exemption and concession apply to both new and established homes where the property will be the buyer's principal place of residence. The buyer must move in within 12 months of settlement and reside there for at least 12 months.

The Victorian First Home Owner Grant is $10,000 for new homes valued up to $750,000. It does not apply to established homes. Buyers purchasing a newly built townhouse or apartment in Box Hill may be eligible for both the stamp duty concession and the grant, depending on the property value.

Box Hill has seen ongoing development of apartment buildings along Station Street and Whitehorse Road, many of which fall within the $750,000 value cap for the grant. Buyers considering new apartments in these precincts should confirm eligibility with the State Revenue Office before signing a contract.

Offset Accounts and How They Reduce Interest

An offset account is a transaction account linked to your home loan. The balance in the offset account reduces the loan balance on which interest is calculated. If you have a loan of $500,000 and $20,000 in your offset account, you pay interest on $480,000.

Offset accounts are typically available on variable rate loans and the variable portion of split loans. They are not commonly offered on fully fixed rate products. Every dollar in the offset account reduces your interest cost at the same rate as your loan, which is usually higher than the interest earned in a standard savings account.

Buyers who receive irregular income, such as annual bonuses or rental income from an investment property held before purchasing a home, benefit from parking those funds in an offset account. The funds remain accessible while reducing the cost of the home loan.

Principal and Interest vs Interest-Only Repayments

Principal and interest repayments reduce the loan balance over time. Each repayment includes an interest component and a principal component, with the principal portion increasing as the loan progresses. This structure builds equity and is standard for owner-occupied home loans.

Interest-only repayments cover the interest cost only, leaving the principal balance unchanged. Interest-only periods are typically available for one to five years on owner-occupied loans, after which the loan reverts to principal and interest. Monthly repayments are lower during the interest-only period, but the total interest cost over the life of the loan is higher because the principal is not reduced.

Interest-only structures are more common for investment loans, but some owner-occupiers use them during periods of reduced income or high expenditure, such as parental leave or business setup. Lenders assess serviceability on a principal and interest basis regardless of the initial repayment structure.

Serviceability and the Interest Rate Buffer

Lenders assess new borrowers' capacity to service a home loan at an interest rate that is at least 3.0 percentage points above the loan product rate. If you apply for a variable rate loan with an interest rate of 6.19%, the lender tests your ability to service the loan at 9.19% or higher.

This buffer ensures borrowers can continue to meet repayments if rates rise. Your income, existing debts, living expenses, and dependants all factor into the serviceability assessment. Buyers with high levels of personal debt, such as car loans or credit card balances, may find their borrowing capacity reduced.

For buyers in Box Hill, proximity to Deakin University and the Box Hill Institute means many applicants are young professionals or graduates with student debt. HECS-HELP balances are included in the serviceability calculation at a repayment rate linked to income thresholds.

Portable Loans and Refinancing After Purchase

A portable loan allows you to transfer your existing home loan to a new property without discharging and reapplying. If you sell your Box Hill unit and purchase a house in Doncaster within a short timeframe, portability may allow you to retain your current interest rate and loan terms.

Not all lenders offer portability, and conditions apply. The new property must meet the lender's valuation and serviceability criteria, and any increase in the loan amount is subject to reassessment.

Buyers who do not have portability can refinance after settlement. Refinancing involves switching to a new lender or negotiating a new loan with your current lender. Refinancing may provide access to lower rates, different loan features, or additional borrowing for renovations. Conducting a loan health check within 12 to 24 months of settlement helps identify whether your loan remains suitable as your circumstances change.

Traj Finance works with buyers across Box Hill and surrounding suburbs including Doncaster, Mont Albert, and Surrey Hills. Call one of our team or book an appointment at a time that works for you.

Frequently Asked Questions