Top 10 Ways First Home Buyers Can Purchase a Townhouse

Why Townhouses Make Sense for First Home Buyers

Townhouses sit in the middle ground between apartments and detached houses, offering more space and often a small courtyard or backyard without the full price tag of a freestanding home. For PAYG professionals buying their first property, a townhouse can provide enough room to grow while keeping the purchase price within reach of a 5% or 10% deposit.

The expanded First Home Guarantee removed income caps from October last year, which means you can now buy with as little as 5% down without paying Lenders Mortgage Insurance, regardless of what you earn. That change opened up townhouse ownership to a much wider pool of buyers who were previously priced out by LMI or the need to save 20%.

How the First Home Guarantee Works for Townhouse Buyers

The First Home Guarantee allows you to purchase with a 5% deposit and the government guarantees the remaining 15% to the lender, removing the need for LMI. This applies to both new and established homes, including townhouses, as long as the property meets the relevant price cap for your state.

Consider a buyer looking at a two-bedroom townhouse in an inner-ring suburb. Instead of waiting years to save a 20% deposit, they can move forward with around 5% plus costs for settlement and adjustments. The main requirement is that you are an Australian citizen or permanent resident, at least 18 years old, and you have not previously owned property in Australia.

You can combine this scheme with state-based stamp duty concessions and grants, which we cover shortly. The property must be owner-occupied, and you need to move in within 12 months of settlement.

Choosing Between 5% and 10% Deposit Options

A 5% deposit gets you into the market sooner, but a 10% deposit often unlocks better interest rates and a wider choice of lenders. Some lenders reserve their sharpest pricing for borrowers with at least 10% equity, even when LMI is covered by the guarantee.

In our experience, buyers who can stretch to 10% often end up with a lower rate and slightly lower monthly repayments, which can make a real difference over the life of the loan. If you are close to the 10% mark, it can be worth holding off an extra few months to get there, especially if rates are steady.

The decision also depends on how much you want to keep in reserve after settlement. Townhouses sometimes come with strata levies and maintenance costs that are higher than apartments, so having a buffer matters.

Stacking State Grants and Concessions with Federal Schemes

Most states offer a combination of cash grants and stamp duty relief for first home buyers, and many of these can be used alongside the First Home Guarantee. The grants typically apply to new homes only, while stamp duty concessions often cover both new and established properties.

In New South Wales, for instance, eligible buyers pay no stamp duty on properties under $800,000 and can receive a $10,000 grant if buying a new townhouse valued up to $750,000. Victoria offers a similar $10,000 grant for new homes and full stamp duty exemption up to $600,000.

Queensland has the most generous cash grant at $30,000 for new homes under $750,000, but that scheme is currently set to expire at the end of June this year. If you are buying in Queensland, confirming whether the grant has been extended is a priority. South Australia abolished stamp duty entirely for first home buyers purchasing new homes, which can save tens of thousands on a townhouse purchase.

What to Look for in a Townhouse as a First Home Buyer

Not all townhouses are created equal when it comes to home loan approval and long-term value. Lenders pay attention to things like strata management, the total number of units in the complex, and whether the property has any commercial use or short-term rental restrictions.

A townhouse in a small complex with a well-managed body corporate is typically more attractive to a lender than one in a sprawling development with high levies and deferred maintenance. If the property has shared walls, the lender will want to see appropriate insurance and building reports.

Location also matters, not just for lifestyle but for serviceability. A townhouse close to transport, schools, and employment hubs will hold its value and give you flexibility if you need to refinance or sell down the track.

Fixed or Variable Rate for Your First Townhouse Loan

Your first instinct might be to lock in a fixed rate for certainty, but that is not always the best call. Fixed rates offer predictable repayments, which can help with budgeting in the first few years of ownership. Variable rates, on the other hand, come with features like offset accounts and the ability to make extra repayments without penalty.

If you expect your income to grow or you plan to put bonuses and tax returns toward the loan, a variable rate with an offset can save you more in the long run than a fixed rate ever will. Some buyers split their loan, fixing a portion for stability and leaving the rest variable for flexibility.

Whatever you choose, avoid fixing the entire amount unless you are certain you will not want to refinance, sell, or pay down the loan early. Break costs on fixed loans can run into the thousands if rates drop or your circumstances change.

How the First Home Super Saver Scheme Boosts Your Deposit

The First Home Super Saver Scheme lets you salary sacrifice up to $15,000 per year into your super fund, up to a total of $50,000, and then withdraw it for your first home deposit. Contributions are taxed at 15% instead of your marginal rate, which can be a significant saving if you earn a decent income.

As an example, a buyer on a marginal tax rate of 32.5% who contributes $15,000 per year for three years would save around $7,875 in tax compared to saving the same amount in a standard bank account. That is extra money you can put toward your deposit or settlement costs.

The scheme works particularly well for PAYG employees because salary sacrificing is straightforward to set up through your employer. You need to apply to release the funds through the ATO before settlement, so factor in a few weeks for processing.

Borrowing Capacity and Serviceability for Townhouse Buyers

Lenders assess your borrowing capacity based on your income, expenses, existing debts, and the loan-to-value ratio. For a townhouse purchase, they also consider strata levies as part of your ongoing costs, which can reduce how much you are able to borrow.

If you have a car loan, personal loan, or credit card with a high limit, paying those down or closing unused accounts before you apply can increase your borrowing power by thousands. Even a credit card you never use will be assessed as if you have maxed it out, which eats into your serviceability.

Getting pre-approval before you start looking gives you a clear budget and makes your offer more attractive to vendors. Pre-approval is usually valid for three to six months, depending on the lender, and it locks in your borrowing capacity at that point in time.

Using Genuine Savings and Gift Deposits

Most lenders require at least 5% of your deposit to come from genuine savings, meaning funds you have saved over at least three months. This shows the lender you can manage money and cover ongoing loan repayments.

Gift deposits from immediate family are generally accepted for the remainder of the deposit, but the lender will want a signed letter confirming the money is a gift and not a loan. If your parents or siblings are helping you out, make sure that documentation is sorted before you submit your application.

Some lenders are more flexible than others when it comes to accepting gifted funds, so if a large part of your deposit is coming from family, it is worth shopping around or working with a broker who knows which lenders will approve that structure.

What Happens After Pre-Approval

Once you have pre-approval and you have found a townhouse you want to buy, the formal application process begins. The lender will order a valuation to confirm the property is worth what you are paying, and they will conduct a final assessment of your financial position.

If the valuation comes in below the purchase price, you will either need to renegotiate with the vendor, increase your deposit to cover the shortfall, or walk away. Valuations can be conservative, especially in suburbs where sales are infrequent or property types vary widely.

Settlement usually takes place four to six weeks after contracts are exchanged, depending on what you negotiate with the vendor. During that time, your mortgage broker will manage the loan documentation, liaise with your solicitor, and make sure everything is in place for settlement day.

Need help working out your deposit, your borrowing power, or which lenders will back your townhouse purchase? Call one of our team or book an appointment at a time that works for you.

Frequently Asked Questions