The Easiest Way to Buy a Terrace as a First Home Buyer

What Makes a Terrace House Attractive for First Home Buyers

A terrace house gives you more space than an apartment without the full price of a detached home. In Melbourne's inner and middle suburbs, terraces often come with a courtyard or small backyard, period features, and a sense of permanence that appeals to buyers planning to stay put for a while. Many first home buyers are drawn to the character of older terraces in areas like Fitzroy, Richmond, or Brunswick, while others prefer renovated versions in growth corridors such as Footscray or Coburg.

The challenge is that terraces in established Melbourne suburbs rarely qualify for the Victorian First Home Owner Grant, which only applies to new homes valued up to $750,000. That means you'll rely on stamp duty concessions and low deposit options rather than a cash grant. The full stamp duty exemption applies to properties up to $600,000, with a sliding scale concession extending to $750,000. Above that threshold, standard stamp duty rates apply.

Consider a buyer looking at a two-bedroom terrace in Northcote. At the suburb's current median, they would fall within the full stamp duty exemption range, saving several thousand dollars compared to a non-first home buyer. That exemption alone can make the difference between needing a larger cash deposit and being able to proceed with a 5% deposit under the Australian Government 5% Deposit Scheme.

How the 5% Deposit Scheme Works for Terrace Purchases

You can buy an established terrace in Melbourne with a 5% deposit if you meet the eligibility criteria. Housing Australia guarantees the difference between your deposit and 20% of the property value, which means lenders mortgage insurance is not payable. The property price cap in Melbourne is $950,000, and there are no income limits or annual place caps. Applications are made through one of the 31 participating lenders, not directly through Housing Australia.

The scheme applies to both new and established homes, so a terrace in an inner suburb is just as eligible as a new townhouse in a growth area. You still need to demonstrate genuine savings and meet the lender's serviceability criteria, but the removal of lenders mortgage insurance can save you tens of thousands of dollars compared to a standard low deposit loan.

In our experience, first home buyers purchasing terraces often prefer this scheme over family guarantor arrangements because it gives them full ownership from day one without requiring a parent to use their home as security. The scheme also allows you to include gifted funds as part of your deposit, provided you meet the lender's minimum genuine savings requirement.

Fixed or Variable: Choosing the Right Rate Structure

Most lenders allow you to choose between a fixed interest rate, a variable interest rate, or a split between the two. A fixed rate locks in your repayment amount for a set period, usually between one and five years. A variable rate moves with the market and typically comes with features like an offset account or redraw facility.

If you expect your income to increase or plan to make extra repayments, a variable rate gives you flexibility. If you want certainty over your repayments while you adjust to homeownership, a fixed rate can make budgeting simpler. Many first home buyers split their loan, fixing a portion for security and leaving the rest variable to access features like an offset account.

The decision depends on your financial situation and how you plan to manage the loan over the first few years. A buyer purchasing a terrace in Hawthorn with plans to rent out a room might prefer a variable loan with an offset account, allowing them to park rental income in the offset and reduce interest without locking away the funds. A buyer in Preston on a stable income who values predictable repayments might fix the entire loan for three years.

What Happens If Your Deposit Includes a Gift

Lenders treat gifted funds differently depending on the loan type and your overall financial position. Under the 5% Deposit Scheme, you can include a gift as part of your deposit, but you'll still need to show genuine savings. Most lenders require at least 5% of the purchase price to come from savings you've accumulated over at least three months, though this varies by lender.

A gift from a parent or close relative is generally acceptable as long as it's documented with a statutory declaration confirming the funds are a genuine gift and not a loan. Some lenders also accept the First Home Super Saver Scheme, which allows you to withdraw voluntary superannuation contributions to use as part of your deposit.

As an example, a buyer purchasing a terrace in Yarraville might have saved $30,000 over two years and received a $20,000 gift from family. The lender would assess whether the $30,000 meets the genuine savings requirement, then add the gift to calculate the total deposit. The combination could bring the deposit to 5% or higher, depending on the purchase price, and allow the buyer to proceed without lenders mortgage insurance under the 5% Deposit Scheme.

Pre-Approval: How It Helps When You're Ready to Buy

Getting pre-approval before you start attending inspections gives you a clear budget and shows agents you're a serious buyer. Pre-approval is conditional approval from a lender based on your income, expenses, and financial position. It's not a guarantee, but it confirms the lender is willing to lend you a specific amount subject to a satisfactory property valuation and final checks.

Pre-approval is particularly useful when buying a terrace in a competitive area where properties move quickly. You'll know exactly what you can afford, which helps you avoid wasting time on properties outside your range or missing out because you hadn't started the application process.

The process involves submitting payslips, bank statements, identification, and details of your deposit. The lender will assess your borrowing capacity based on your income, existing debts, and living expenses. Pre-approval is typically valid for three to six months, depending on the lender, and can be updated if your circumstances change.

The Role of Offset Accounts and Redraw Facilities

An offset account is a transaction account linked to your home loan. The balance in the offset account reduces the amount of interest you pay without reducing your loan balance. If you have a $500,000 loan and $20,000 in your offset account, you only pay interest on $480,000. You can access the funds in the offset account at any time.

A redraw facility allows you to make extra repayments on your loan and withdraw those extra funds later if needed. The key difference is that redraw reduces your loan balance immediately, while an offset keeps the funds separate. Offset accounts are generally only available on variable rate loans, while redraw is available on both variable and some fixed rate loans.

For first home buyers, an offset account is often more flexible because you can deposit your savings and reduce interest without committing those funds permanently. If you're buying a terrace and planning to carry out minor renovations over the first year, keeping your savings in an offset account lets you reduce interest while maintaining access to the funds for those works.

When Lenders Mortgage Insurance Still Applies

If you're not using the 5% Deposit Scheme or a family guarantor, and you're borrowing more than 80% of the property value, the lender will charge lenders mortgage insurance. LMI protects the lender if you default on the loan, and the cost varies depending on your deposit size and loan amount. LMI is a one-off fee that can be paid upfront or added to your loan balance.

The cost can range from a few thousand dollars to over $30,000 depending on the loan size and deposit. Some lenders offer LMI waivers for specific professions or under certain conditions, but these are not universally available. The 5% Deposit Scheme removes LMI entirely, which is one of the main reasons it's become the preferred option for many first home buyers.

If you're purchasing a terrace outside the Melbourne price cap of $950,000, you won't be eligible for the 5% Deposit Scheme and will need to either pay LMI, save a larger deposit, or use a guarantor to avoid it.

Call one of our team or book an appointment at a time that works for you. We'll walk you through your home loan options, confirm your eligibility for the 5% Deposit Scheme and stamp duty concessions, and help you put together a loan structure that fits the way you plan to use the property. Whether you're looking at a terrace in Collingwood or Reservoir, we'll make sure your application is set up correctly from the start.

Frequently Asked Questions