Understanding the basics of your first home loan

Your first home loan starts with a deposit, a lender willing to support you, and a clear view of what you can afford.

Most lenders ask for at least 5% of the purchase price, though some structures allow you to borrow with less if you qualify for a government guarantee or shared equity program. The Australian Government 5% Deposit Scheme lets eligible first home buyers purchase with a 5% deposit without paying LMI, provided the property value sits below the relevant cap. For Sydney and regional centres across New South Wales, that cap is currently $1,500,000.

How much you can borrow depends on serviceability, not just deposit size

Lenders assess your borrowing capacity by running your income, expenses, and existing debts through a serviceability calculation. Under APRA's framework, they must test whether you can afford repayments at a rate that sits 3 percentage points above the actual loan rate. If the variable rate on offer is 6.2%, the lender tests you at 9.2%.

Consider a couple earning a combined $140,000 before tax. They have $90,000 saved and want to buy an apartment in Parramatta at the suburb's current median for a two-bedroom unit. After accounting for rent, car finance, and regular living costs, the lender runs their application through the buffer and approves them for a loan amount that keeps monthly repayments sustainable even if rates rise. The deposit covers 5%, the government guarantee fills the gap to 20%, and they avoid LMI entirely.

Debt-to-income lending limits also apply from 1 February 2026. Lenders can only write 20% of their new owner-occupier loans to borrowers with total debt of six times their income or more. If your household income is $100,000 and your proposed home loan plus any other debt totals $650,000, you sit above the six-times threshold. That does not mean you will be declined, but it does mean the lender must manage their portfolio to stay within the 20% cap.

Variable, fixed, or split: choosing the rate structure that fits your circumstances

A variable rate moves with the market. When the Reserve Bank changes the cash rate or your lender adjusts their pricing, your repayments shift accordingly. A variable home loan usually includes an offset account, which is a transaction account linked to your loan. Every dollar in the offset reduces the balance on which interest is calculated, which can shorten your loan term and reduce total interest paid over time.

A fixed rate locks in your repayments for a set period, typically between one and five years. You gain certainty, but you also lose access to offset accounts in most cases, and break costs apply if you repay the loan early or refinance before the fixed term ends. Break costs reflect the lender's funding loss when you exit a fixed contract, and the calculation depends on wholesale rate movements during your fixed period.

A split loan divides your borrowing between fixed and variable portions. You might fix 60% of the loan to protect against rate rises and keep 40% variable to maintain access to an offset and preserve flexibility for additional repayments.

Pre-approval gives you a clear budget before you start searching

Pre-approval is a conditional commitment from a lender based on your income, deposit, and financial position at the time of application. It tells you what you can afford and gives you confidence when making an offer. Most pre-approvals last three to six months, though some lenders issue shorter terms depending on market conditions.

The lender reviews your payslips, tax returns, bank statements, and existing liabilities. They run a credit check and apply the serviceability buffer. If you meet their criteria, they issue a pre-approval for a specific loan amount. You still need a formal property valuation and final credit assessment once you find a property, but the heavy lifting is done.

In suburbs like Ryde or Blacktown, where stock moves quickly and competition remains strong, a pre-approval lets you act without hesitation when the right property appears. Sellers and agents take you seriously, and you avoid the disappointment of making an offer only to find out your borrowing capacity falls short.

Stamp duty concessions and grants reduce upfront costs in New South Wales

New South Wales offers a full stamp duty exemption on new and established homes valued up to $800,000 for first home buyers. A sliding concession applies on properties valued between $800,001 and $1,000,000. No exemption or concession applies at $1,000,000 or above. You must move into the property within 12 months of settlement and live there as your principal place of residence for at least 12 continuous months.

The First Home Owner Grant in New South Wales is $10,000 and applies to new builds or substantially renovated homes only, with a purchase price cap of $600,000 or a combined land and build cap of $750,000. The grant does not apply to established homes. You can use the stamp duty concession and the grant together if you meet the eligibility criteria for both.

In a scenario like this: a buyer purchasing a new townhouse in Campbelltown for $680,000 qualifies for both the full stamp duty exemption and the $10,000 grant. That combination reduces settlement costs by more than $25,000, which means less pressure on savings and a stronger financial position at settlement.

Principal and interest repayments build equity from day one

Most owner-occupied home loans in Australia are structured as principal and interest. Each repayment covers the interest charged for that period and also reduces the loan balance. Over time, the interest portion shrinks and the principal portion grows, which means you build equity and move closer to owning the property outright.

Interest-only repayments are available on some owner-occupied loans, but they are more common in the investor space. With interest-only, you pay only the interest charged each month and the loan balance stays the same. That keeps repayments lower in the short term, but you do not build equity unless the property value increases. Most lenders limit interest-only periods to five years on owner-occupied lending, and APRA's framework treats long-term interest-only loans with an LVR above 80% as non-standard.

Lenders Mortgage Insurance is a cost you pay when your deposit sits below 20%

LMI protects the lender if you default and the property sells for less than the outstanding loan balance. The premium is calculated on a sliding scale based on your loan amount and LVR, and it is a one-off cost you pay at settlement. You can add the premium to your loan balance, though that increases the total amount you borrow and the interest you pay over time.

If you borrow with a 10% deposit and do not qualify for a government guarantee, LMI applies. The premium might range from a few thousand dollars to more than $20,000 depending on the loan size and LVR. Government schemes like the Australian Government 5% Deposit Scheme remove the need for LMI by providing a guarantee to the lender, which is why they remain a strong option for first home buyers with smaller deposits.

Call one of our team or book an appointment at a time that works for you. We compare home loan products from lenders across Australia, run the numbers on deposit structures and government schemes, and make sure your first home loan fits your income, your timeline, and your long-term plans.

Frequently Asked Questions