Understanding Variable Rate Loans for First Home Buyers
When you're buying your first home, understanding the fees and costs associated with variable interest rate loans is crucial. While many first home buyers focus on the interest rate itself, the additional costs can significantly impact your first home buyer budget. Let's break down what you need to know.
A variable interest rate loan means your interest rate can move up or down during the life of your loan. Unlike a fixed interest rate that stays the same for a set period, variable rates respond to changes in the market. This flexibility comes with specific fees and costs that you should factor into your first home buyer checklist.
Common Fees Associated with Variable Rate Loans
When you apply for a home loan with a variable rate, you'll encounter several types of fees. Here are the most common ones:
Application Fees: Some lenders charge a fee when you submit your first home loan application. This can range from $0 to $1,000 depending on the lender. Many lenders have removed this fee to remain attractive in the market.
Valuation Fees: Lenders need to confirm your property's worth before approving your loan. Valuation fees typically cost between $200 and $600, though some lenders cover this cost.
Settlement Fees: These cover the administrative costs of finalising your loan, usually ranging from $150 to $800.
Legal and Conveyancing Fees: You'll need a solicitor or conveyancer to handle the legal aspects of your property purchase. Budget around $1,500 to $3,000 for these services.
Ongoing Costs to Consider
Beyond the upfront fees, variable rate loans come with ongoing costs that affect your monthly budget:
Monthly Loan Repayments: Your principal and interest repayments will vary as the interest rate changes. This can make budgeting slightly more challenging compared to a fixed interest rate.
Annual Package Fees: Some variable rate loans include an annual package fee of $200 to $400. These packages often come with features like an offset account or redraw facility.
Account Keeping Fees: Some lenders charge monthly account keeping fees, typically $10 to $15 per month.
Lenders Mortgage Insurance (LMI)
For many first home buyers using low deposit options like a 5% deposit or 10% deposit, Lenders Mortgage Insurance (LMI) represents one of the largest upfront costs. LMI protects the lender if you can't meet your repayments, and it's typically required when borrowing more than 80% of the property's value.
The cost varies based on your deposit size and loan amount, but it can range from a few thousand to tens of thousands of dollars. However, schemes like the First Home Loan Deposit Scheme and Regional First Home Buyer Guarantee can help you avoid LMI even with a smaller deposit.
First Home Buyer Concessions and Grants
Australian first home buyers can access several benefits that offset some of these costs:
First Home Owner Grants (FHOG): Available in most states, these grants provide financial assistance when buying your first home.
First Home Buyer Stamp Duty Concessions: Many states offer reduced or waived stamp duty for eligible first home buyers, potentially saving tens of thousands of dollars.
First Home Super Saver Scheme: This allows you to save for your deposit using your super fund, potentially benefiting from tax advantages.
Understanding your first home buyer eligibility for these programs is essential when calculating your overall costs.
Features That Add Value
Variable rate loans often include features that can offset some costs:
Offset Account: This account links to your home loan and reduces the interest you pay. Any money in your offset account effectively reduces your loan balance for interest calculation purposes.
Redraw Facility: If you make extra repayments, a redraw facility lets you access that money if needed. Some lenders charge for this service, while others offer it without fees.
Interest Rate Discounts: Many lenders offer discounts off their standard variable rate, particularly for first home buyers or those with larger deposits.
Making Extra Repayments Without Penalties
One advantage of variable interest rate loans is the flexibility to make additional repayments without penalty. This can help you pay off your first home loan faster and save thousands in interest over time. However, always confirm this with your lender, as some variable loans do have restrictions.
Government Assistance Programs
Several government initiatives can reduce your upfront costs when you apply for a home loan:
- First Home Loan Deposit Scheme: Allows eligible buyers to purchase with as little as a 5% deposit without paying LMI
- Regional First Home Buyer Guarantee: Similar benefits for those buying in regional areas
- State-based first home buyer grants: Vary by location but can provide additional financial support
These programs can significantly reduce the barriers to entering the property market.
Comparing Home Loan Options
When reviewing different home loan options, look beyond the advertised interest rate. Consider:
- Total fees over the first year
- Features included in the loan
- Flexibility for extra repayments
- The ability to switch to a fixed rate later
- Access to offset accounts and redraw facilities
Your borrowing capacity will influence which lenders and products are available to you.
The Pre-Approval Process
Getting pre-approval before you start property hunting is highly recommended. This involves a lender assessing your home loan application and confirming how much they'll lend you. While pre-approval might involve some application fees, it strengthens your position when making offers and helps you understand your budget constraints.
Some lenders don't charge for pre-approval, making it a valuable tool in your first home buyer checklist.
Gift Deposits and Additional Funding
If you're using a gift deposit from family members, be aware that lenders have specific requirements about documentation and the source of these funds. This won't typically attract additional fees, but proper documentation is essential for your home loan application to proceed smoothly.
Working with a Mortgage Broker
A mortgage broker can help you compare home loan options across multiple lenders, potentially finding you better interest rate discounts and lower fees. At Mortgage Path, we work with first home buyers throughout South Brisbane and Australia to find suitable variable rate loans that match their circumstances.
Brokers can also help you understand which fees are negotiable and how to structure your loan for maximum benefit.
Buying your first home involves many moving parts, but understanding the fees and costs associated with variable interest rate loans puts you in a stronger position. By factoring these expenses into your budget from the start, you'll avoid surprises and can focus on finding the right property.
Remember to research all available first home buyer concessions and government programs that can reduce your upfront costs. Every dollar saved on fees and LMI is money you can put toward your deposit or keep as a buffer for those unexpected expenses that come with homeownership.
Call one of our team or book an appointment at a time that works for you. We'll help you understand your options and find a variable rate loan that suits your needs as a first home buyer.
