Buying your first home? Here are four things you need to watch out for

A growing number of first home buyers are rushing to join the property market, lured in by historically low rates. But they may not be looking at the whole picture.

New data from the Real Estate Institute of Australia (REIA)’s Housing Affordability Report, for the September quarter 2019, recorded the highest percentage of first home buyers entering the Australian marketplace in eight years.

REIA President Adrian Kelly said: “Although the average loan amount has risen, the increase in family income and the decrease in the interest rates have negated this rise.”

As a result of three Reserve Bank of Australia cash rate cuts in 2019, Australian borrowers have seen home loan rates plummet to record lows.

Lenders have also reduced their serviceability floors in response to lower market rates. Easing back on this part of the home loan assessment means would-be borrowers may find getting a home loan is a little easier. Plus, they may now be able to borrow thousands more.

These changes may have worked to create an ideal setting for first home buyers to take a bigger piece of the home loan pie. However, there are a few risks that first home borrowers should consider before they leap into this new mortgage environment.

First home buyer growth in Australia

In the September 2019 quarter, the number of new loans to first home buyers grew by 9,270 (13.6 per cent), and 6.8 per cent over the year.

According to REIA data, 29.4 per cent of all new loans in the September quarter (excluding refinancing) were to first home buyers, the highest percentage since December 2011.

State-based first home buyer figures

Source: REIA Housing Affordability Report, September 2019 quarter.

The risks first home borrowers face

While taking advantage of low rates and easier loan assessment criteria can be beneficial, it’s important for first home buyers to be aware of the potential home loan traps.

1.Can you afford a 3 per cent rate increase?

Home loan rates are low now, but they could increase one day. Before applying for any home loan, it’s recommended you calculate whether you can afford a potential 3 per cent increase on your mortgage rates.

For example, a $500,000 30-year home loan on a rate of 3.20 per cent (excluding fees) would only cost $2,162 in monthly repayments. A hypothetical rate increase of 3 per cent to 6.20 per cent would see mortgage repayments shoot up to $3,062 per month. This is an increase of $900 a month could see the unprepared fall into mortgage stress.

Before applying for a home loan, consider if a 3 per cent rate increase is something you could afford with your current household income.

2.Low rates but high fees

A common trap that borrowers can fall into is not looking at the fees associated with their home loan. Low advertised rates on a home loan can often mean you will be charged higher than average fees for other services. This is why it’s valuable to look at a home loan’s comparison rate, not just its advertised rate.

Comparison rates were introduced in response to lenders advertising low rate loans to attract customers. The loan would end up costing more due to high upfront and ongoing fees, so these comparison rates provide an ‘accurate’ view of what a loan may really cost you.

You might be able to skip some fees altogether, if you do your research. According to RateCity data, the average application fee is $570 and the average ongoing fee is $257. However, 47 per cent of home loans in the RateCity database don’t charge application fees and 53 per cent don’t charge any ongoing fees.

• It’s also valuable to get a Key Facts and Figures Sheet from your lender, to be sure you are aware of all fees associated with the loan.

3.‘Honeymoon’ rates with a sting in their tail

Introductory, or ‘honeymoon’ rates are the name of special low interest rates applied to new loans for an initial period of time, usually 6 – 12 months. After this introductory term, the rate then reverts to the (generally higher) standard variable rate.

These types of rates are designed to attract new borrowers to banks. You may feel a bit of breathing room in the first year, but you run the risk of paying higher repayment amounts than you can afford once the introductory term ends.

First home buyers should do their homework before choosing any home loan. Keep an eye out for the comparison rates with introductory loans. If it’s significantly higher than the advertised rate, there may be a costly catch.

4.Sticking with your childhood bank

You wouldn’t buy a house without doing the research first, such as looking into the neighbourhood or comparing prices of other houses sold on the street. So why don’t we do the same for home loan providers?

Getting a home loan with the bank you’ve been with since you were a kid is often the option that takes the least effort, but it may not be the best option for you.

In fact, you could miss out on some serious savings by not shopping around.

Get a low rate home loan that works for you

According to RateCity research, owner-occupier principal and interest home loan rate is 3.75 per cent and the average variable investor principal and interest home loan rate is 4.13 per cent.

If you’re considering a home loan with a much higher rate than the rates above, you might want to consider checking out smaller lenders with more competitive rates.

Here is a list of the current lowest rate loans on the RateCity marketplace:

Low rate owner-occupier loans

Note: Data accurate as at 5 December 2019. Figures based on 30-year home loan under $1 million, paying principal and interest.

Low rate investor loans

Note: Data accurate as at 5 December 2019. Figures based on 30-year home loan under $1 million, paying principal and interest.

Compare home loans in Australia