Mortgage Options for First-Time Home Buyers in Adelaide

Here’s how to choose the mortgage that’s right for you.

New to buying property? Or just trying to understand the financial implications before deciding to jump in?

We get how frustrating it can be to sort through all the information out there.

And one of the biggest questions newcomers have is around mortgages.

What is a mortgage? How do mortgages actually work? Are there different types of mortgages? And what options do I have when it comes to choosing the right mortgage for me?

It makes sense to have questions, given a mortgage is one of the biggest financial decisions you’ll ever make.

You’re potentially taking on a large debt for several decades, so spending some time working out which mortgage is going to work for you, your lifestyle and your long-term wealth is definitely time well spent.

But first, it’s important to understand what your choices are.

Here, we aim to demystify the various types of mortgages available in Australia, and give you a basic understanding of each, so that you can chat to your bank, mortgage broker or financial institution with confidence.

First things first - what is a mortgage?

Understanding what a mortgage is, is your first step towards homeownership.

Essentially, in Australia, a mortgage is a type of secured loan where the property you buy is used as collateral.

When you take out a mortgage, you agree to pay back the amount borrowed - along with interest - over a predetermined period.

The upside is that you don’t need to pay the entire sale price of the home upfront. However, the downside means that if you're unable to keep up with your repayments, your lender could potentially take back your home to recover their funds.

Generally, the lender holds a claim on the property until the loan is fully repaid.

How does a mortgage work in Australia?

Choosing the right mortgage begins with understanding how they operate.

In Australia, mortgages typically require a deposit, or down payment - often 20% of the home's price - followed by monthly repayments that cover both principal and interest.

The remainder is then paid back over time as a series of repayments, plus interest.

Repayments consist of two elements – the ‘principal’ and the ‘interest’. The principal is the amount borrowed to buy the property, while the interest is the cost of borrowing the money from your bank or lender.

It’s important to note that mortgage terms can vary, affecting your financial commitments over time, and different lenders offer different terms and conditions which can affect how you manage and repay your loan.

What are the 5 stages of taking out a mortgage?

While the mortgage process can be complex, it can essentially be broken down into five key stages:

Pre-approval, where lenders assess your financial situation to see how much they are willing to lend you.
Property search, which involves finding a suitable house that fits your pre-approved budget.
Loan application, where you submit detailed financial information to get the lender's final approval.
Loan settlement, finalises the mortgage agreement.
Repayment, where you typically pay back the loan in instalments over time until the debt is cleared.

How long does a mortgage run for?

Mortgage durations in Australia commonly span from 10 to 30 years, but the life of your mortgage depends on many factors, including interest rates, how often you choose to make repayments, your ability to repay the debt itself and the cashflow you need to maintain your lifestyle.

However the biggest influencing factor is choosing the right length - or ‘term’ - for you.

A mortgage taken out over a longer term means lower weekly, fortnightly or monthly payments but more interest paid over time, while a shorter term means higher payments but less total interest.

Most common types of mortgages in Australia

In Australia, you generally have three main types of mortgage to choose from – fixed rate, variable rate or split.

Fixed-rate: A fixed rate mortgage locks your interest rate in for a certain period of time - usually 1 – 5 years - ensuring your repayments remain consistent regardless of what’s going on in the market. Essentially, it doesn’t matter if interest rates go up or down - borrowers on fixed-rate mortgages make the same regular payment until that term expires. This predictability, and level of protection from interest rate fluctuations, makes it a favourite among new and first-time home buyers who are adjusting to a new repayment routine
Variable rate: Unlike a fixed-rate mortgage, variable rate mortgages have interest rates that can change with the market. This means that your repayment amounts can go up or down over time. While this may sound unpredictable, uncertain and scary - it does require a certain preparedness for possible rate increases - the upside is that mortgage holders can also take advantage of falling rates when the market dips. Variable rates also offer extra flexibility over fixed rate mortgages. Things like making extra repayments and offset accounts can make this a very attractive option for many soon-to-be mortgagees.
Split loan: For those that like to hedge their bets, a split-rate loan lets you combine the best of both worlds. Like the name suggests, a split loan allows you to divide your mortgage by fixing a portion but keeping the rest variable. As the mortgagee, you can usually decide what percentage of your mortgage you wish to allocate to either rate. This approach provides both stability and flexibility, adapting to both your current financial situation and potential future changes.

Other types of mortgages

While fixed, variable and split mortgages generally cover most buyers’ needs, there are other options to suit more specific situations.

· Introductory home loans:

Also known as honeymoon loans, introductory home loans offer lower interest rates for the initial period of the loan - usually one to two years - means lower payments during the toughest first part of your loan. After this "honeymoon" phase, the rate typically converts a normal variable rate, so it’s important to plan for these higher repayments in advance.

· Investment loans:

Designed for buying properties that are intended to house tenants and generate rental income, investment loans often have different terms and interest rates compared to owner-occupier loans. They may also offer interest-only payments for a period, helping you manage cash flow more effectively. These loans are also generally suitable for those looking to RentVest.

· Construction loans:

Constructions loans are ideal if you’re building your home, as they allow you to draw down the loan in stages to pay for construction costs. The upside? You only pay interest on the money you’ve used. This staged approach helps keep costs down until the house is built, but ensures funds are available when they’re needed.

· Guarantor loans:

If you’ve not saved enough for a deposit, a guarantor loan means someone else, like a family member, can choose to back your loan and use their own property as security. This can often enable you to borrow more than 80% of the property's value and avoid paying Lender's Mortgage Insurance (LMI).

· Interest only loans:

Similar to an investment loan, interest only loans mean you’re only required to pay the interest portion of the loan for a set period, usually up to five years. This is beneficial for managing cash flow in the short term, but is important to consider that you won’t be reducing the principal during this period.

· Self-employed home loans:

Tailored for those who may not have a regular income stream, these loans often require a different proof of income documentation, such as tax returns, lease and hire liability papers and financial statements. Lenders might also use an averaged income figure to assess borrowing capacity, which can sometimes restrict how much you can borrow.

· Low deposit mortgages:

Tailored for buyers who can’t afford a large deposit, or who want to borrow more than 80% of a property’s value, low deposit loans usually attract a Lender's Mortgage Insurance (LMI) fee which protects the lender - not the buyer - in case of default.

· Government assisted loans:

Government assisted programs - such as the First Home Guarantee, Regional First Home Buyer Guarantee, Family Home Guarantee and the Help to Buy Scheme - aim to help first-time buyers enter the market with a lower deposit and, potentially, without LMI. Each scheme has specific eligibility criteria and benefits, so it pays to look into what each entails.

· Reverse Mortgages:

Available to older homeowners, reverse mortgages allow you to borrow against the equity of your existing home without needing to sell it. The loan and any accumulated interest are only repayable when you sell your home, move out or pass away, making it important to understand the long-term impact on your estate.

· Non-conforming home loans:

For those with poor credit history, unusual financial situations or non-traditional income, non-conforming loans can offer a path to homeownership, though they typically attract higher interest rates and stricter terms to offset the lender's increased risk.

When it comes to buying your first home, understanding your options and taking out the right mortgage, can make all the difference.

And as they say, knowledge is power.

Whether opting for the stability of a fixed-rate mortgage, the flexibility of a variable option or the mixed approach of a split loan, comparing the pros and cons of the different mortgage types means you can make a sound decision that aligns with your long term goals.

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As property experts with over 21+ years combined experience in buying, selling and managing property in Adelaide, We Connect Property are ready and waiting to offer expert guidance and support when you need it most, and answer all your questions about buying your next property.

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DISCLAIMER: All recommendations made by We Connect Property are general in nature and not to be relied upon as legal or financial advice. To ensure accuracy, we always strongly recommend seeking independent, professional advice tailored to your specific situation before making any investment or financial decisions.