How to find (and pay for) your first mortgage by yourself

Where do you start looking for your first mortgage? Many budding first homebuyers go straight to their current bank to see if they can get a loan. This may be one of the simplest options, but it may not be the most affordable choice or the best option to suit your financial situation.

When looking beyond their current bank and comparing home loans from other mortgage lenders, many wannabe borrowers start by looking for the lowest interest rates. However, this may lead to disappointment, as many lenders reserve their lowest rates for customers who can fulfil some of the strictest eligibility criteria. This is much more likely to be refinancers than first home buyers.

Many borrowers struggle to save up the deposit required to apply for their first mortgage. If saving up a 20 per cent deposit isn’t a realistic option, you may still be able to apply with a deposit of 10 per cent or even 5 per cent of the property value. That said, not every lender offers this option, and those that do may charge you higher interest rates. Also, keep in mind that the lower your deposit, the more you may need to pay in Lender’s Mortgage Insurance (LMI).

If you’re thinking of getting some help with your first mortgage, whether from a guarantor or via a government support program, make sure that the lender you choose accepts these options before you apply.

“Servicing” a mortgage simply refers to making your home loan repayments. Before a lender will approve your home loan application, they’ll want to be confident that you can comfortably service the repayments without being at too much risk of financial stress if your personal situation were to change.

Using an online calculator, you can estimate how much the repayments on the mortgage you have in mind may cost, and see how these may fit into your household budget. As a rough guideline, if more than one third of your household income is going towards servicing the repayments on your first mortgage, you may be at risk of mortgage stress.

You can use the same online calculator to estimate your borrowing power, using the repayments you can afford to find your potential maximum loan size. Of course, there’s no guarantee that a lender will approve an application for a home loan of that amount.

Another calculator can help you find how much you can borrow based on your income and expenses. Using a similar process to many mortgage lenders, this calculator includes buffers to help reduce the risk of ending up in mortgage stress, providing a closer estimate of how large a home loan a lender may approve, though each lender will conduct its own calculations, which may not match these results.

The simplest ways to improve your ability to service your first mortgage is to increase your income and lower your expenses – if only it were that easy!

One way to show a lender that you’re a relatively safe borrower who could potentially service a larger mortgage is to pay off your other outstanding loans. Lenders may be wary of handing over large sums of money to borrowers who are already in debt, as it may be harder for you to service all of these loans if you end up in financial stress. Clearing some of this debt before you apply for a mortgage could help to reassure a lender.

You may also want to consider lowering your maximum credit card limit and/or cancelling credit cards you’re not using. Even if you always pay off your purchases on time and are never charged interest on your credit card, a lender will still want to be confident that you can afford to service your first mortgage in a ‘worst-case’ scenario where you’ve maxed-out your cards and are paying interest every month.

Choosing a home loan on your own is possible, but it can be challenging. A mortgage broker may be able to help you look at your finances and work out the best mortgage to suit your needs. While brokers may not compare every home loan offer on the market, they may be able to negotiate on your behalf or provide access to special offers that are exclusive to brokers, to help you get a better deal.

Even if you can comfortably afford to service your first home loan repayments with your current income and expenses, saving up the deposit required to qualify for some home loans can sometimes be the real challenge. Depending on your circumstances, you may be able to get some help from government programs such as the First Home Owner Grant (FHOG), the First Home Loan Deposit Scheme (FHLDS) or the Family Home Guarantee (FHG). You could also consider approaching your parents or another close family member about guaranteeing your home loan with the value of the equity in their own property.