The Pros and Cons of Your First Home Loan

Your first home loan application will determine your financial position for years to come.

The loan structure you choose, the deposit scheme you access, and the rate type you select all carry trade-offs that become apparent only after settlement. Understanding those trade-offs before signing allows you to align your borrowing with your career trajectory and income profile.

Fixed Rate Versus Variable Rate: The Core Trade-Off

A fixed rate locks in your repayment amount for a set period, while a variable rate moves with market conditions and typically offers access to offset accounts and additional repayment flexibility.

Consider a solicitor purchasing at the current median in a regional centre, borrowing 90 per cent of the property value. A three-year fixed rate provides certainty during the period when your income may still be building, but prevents you from making additional repayments without incurring break costs. A variable rate allows you to pay down the loan more quickly as your income grows, particularly if you transition from employed to equity partner, but your repayment amount will increase if the Reserve Bank tightens monetary policy.

Under APS 112, lenders assess your capacity to service the loan at a rate at least 3.0 percentage points above the product rate, so you're already tested against a higher rate scenario regardless of which product you choose. The serviceability buffer applies whether you fix, go variable, or split.

A split loan allows you to allocate part of the loan to a fixed rate and part to a variable rate, balancing repayment certainty with the ability to make additional payments on the variable portion. A 50/50 split is common, but the allocation can be tailored to your income profile and risk tolerance.

Australian Government 5% Deposit Scheme: Access and Limitations

The Australian Government 5% Deposit Scheme allows eligible first home buyers to purchase with a deposit of as little as 5 per cent of the property value, with Housing Australia providing a guarantee of up to 15 per cent to the participating lender.

The scheme eliminates the need to pay lenders mortgage insurance on a loan with a high LVR, which can reduce your upfront costs by several thousand dollars. However, the scheme is available only through participating lenders, and not all lenders on the panel offer the same rate discounts or loan features as the broader market. No income caps apply, and no annual place limits apply, so eligibility is determined by whether you meet the first home buyer criteria and the property falls within the applicable price cap.

Property price caps from 1 October 2025 vary by state and region. In New South Wales, the cap is $1,500,000 in Sydney, Newcastle, the Central Coast, and other designated regional centres, and $800,000 in other areas. In Victoria, the cap is $950,000 in Melbourne and Geelong, and $650,000 elsewhere. In Queensland, the cap is $1,000,000 in Brisbane, the Gold Coast, and the Sunshine Coast, and $700,000 in other areas. Both the purchase price and the lender's assessed value must be at or below the cap.

The scheme cannot be combined with Help to Buy, but it can generally be used alongside state and territory stamp duty concessions and grants, depending on the jurisdiction.

Offset Accounts Versus Lower Rates: The Product Feature Decision

An offset account is a transaction account linked to your home loan. The balance in the offset account reduces the interest charged on the loan, without requiring you to make additional repayments into the loan itself.

For a legal professional with variable income, particularly those receiving annual bonuses or profit distributions, an offset account allows you to park funds and reduce interest while retaining access to those funds for other purposes. The alternative is a loan product with a lower interest rate but no offset functionality. The rate difference between an offset product and a non-offset product from the same lender is typically between 0.10 and 0.30 percentage points.

If you maintain an average offset balance of at least 10 to 15 per cent of your loan amount, the interest saved will usually exceed the cost of the higher rate. If your offset balance remains low, the lower rate product will cost less over time. Your income structure determines which approach delivers the better outcome.

Some lenders offer a partial offset, where only a percentage of the offset account balance is applied to reduce the loan interest. A full offset is preferable where available.

State Stamp Duty Concessions: Immediate Cash Saving Versus Long-Term Obligation

Most states and territories offer stamp duty relief for first home buyers, either as a full exemption up to a certain property value or as a sliding concession.

In New South Wales, a full transfer duty exemption applies to new and established homes valued up to $800,000, with a sliding concession on properties valued between $800,001 and $1,000,000. In Victoria, a full exemption applies on properties valued up to $600,000, with a concession on properties valued from $600,001 to $750,000. In Queensland, the first home concession reduces duty but does not eliminate it entirely on established homes, while a full transfer duty concession applies with no price cap for new homes and vacant land for contracts signed on or after 1 May 2025.

The concessions require you to occupy the property as your principal place of residence for a minimum period, typically 12 months. If you're considering a role that may require relocation within the first two years, the residency obligation may conflict with that move. Breaching the residency requirement can result in the concession being clawed back, with penalty interest.

Principal and Interest Versus Interest Only: Repayment Structure and Equity Position

A principal and interest loan requires you to repay both the interest cost and a portion of the loan balance with each repayment. An interest only loan requires you to pay only the interest cost for a set period, typically one to five years, after which the loan reverts to principal and interest.

For a first home purchase, principal and interest repayments build equity from day one, which improves your borrowing capacity if you later seek to purchase an investment property or upgrade. An interest only structure keeps your repayments lower in the short term, but you do not reduce the loan balance during the interest only period, and your repayments will increase significantly when the loan reverts to principal and interest.

Under APS 112, a long-term interest only residential loan is classified as non-standard where the LVR is greater than 80 per cent and the contractual interest only period is greater than five years or is not specified. Most lenders will not offer interest only terms on an owner-occupied loan above 80 per cent LVR. If you're borrowing at 90 or 95 per cent LVR, the loan will almost always be structured as principal and interest.

Interest only can be appropriate where you expect a significant income increase within the interest only period and plan to make lump sum repayments once that increase occurs, but that scenario is less common for an owner-occupied first home than for an investment property.

Help to Buy: Reduced Deposit in Exchange for Shared Equity

The Help to Buy scheme allows the Australian Government to contribute up to 40 per cent of the purchase price for a new home and up to 30 per cent for an existing home in exchange for a proportional equity stake, with a minimum 2 per cent deposit required.

From 1 July 2026, income limits are $103,000 for individual applicants and $165,000 for joint applicants or single parents. The scheme reduces the amount you need to borrow, which lowers your repayments and interest cost, but the government holds an equity interest in the property and is entitled to a proportional share of any capital gain when you sell or refinance.

If you purchase a property for $600,000 using Help to Buy with a 30 per cent government contribution, the government holds a $180,000 equity stake. If the property value increases to $750,000, the government's share increases to $225,000. You repay the government's share at market value when you exit the scheme, either by selling the property or refinancing to a standard loan.

The scheme is designed for buyers who can service a loan but lack the deposit to purchase without paying LMI. Up to 10,000 places are available in the 2026-27 financial year, and applications are made through participating lenders. The scheme cannot be combined with the 5% Deposit Scheme.

LMI Waivers for Legal Professionals: Eligibility and Rate Implications

Some lenders offer LMI waivers for lawyers and other legal professionals, allowing you to borrow up to 90 per cent LVR without paying lenders mortgage insurance. Eligibility typically requires a minimum income, a clean credit history, and proof of admission to practice.

The waiver eliminates the LMI premium, which can be several thousand dollars on a high LVR loan, but the lender's risk weight on the loan remains unchanged under APS 112, so the interest rate offered may not be as sharp as a loan with an 80 per cent LVR. Some lenders apply a rate loading to loans above 80 per cent LVR even where LMI is waived.

If you're eligible for both an LMI waiver and the 5% Deposit Scheme, compare the rate and features offered under each pathway. The 5% Deposit Scheme may provide access to a broader range of lenders, while an LMI waiver may offer access to specific loan features or rate discounts that are not available through the scheme.

Pre-Approval: Timing and Conditional Offers

Getting loan pre-approval allows you to understand your borrowing capacity and attend auctions or make offers with confidence, but a pre-approval is a conditional assessment and can be withdrawn if your circumstances change or if the lender's credit policy tightens.

Pre-approval is typically valid for three to six months, depending on the lender. If you apply for pre-approval and then accept a new role, change from employed to contract, or take on additional debt, you must disclose that change to the lender. Failing to disclose a material change can result in the pre-approval being revoked or the final approval being declined.

A pre-approval is not a rate lock. The interest rate offered at pre-approval will be confirmed at the time of formal approval, and the rate may have changed in the interim. Some lenders allow you to lock a rate for a short period, typically 90 days, but rate locks are more commonly available once you have a signed contract.

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