Smart ways to approach buying a terrace as a first home

Buying a terrace house as your first home means balancing heritage appeal with borrowing power.

Terraces sit somewhere between apartments and freehold houses. You often get less outdoor space than a detached property, but more control than a unit. They can be cheaper than a house on a full block, but older terraces sometimes come with condition issues that affect how much a lender will let you borrow. The deposit size you need, the loan structure that suits you, and the government schemes you can access all depend on whether the terrace is classified as strata or freehold, and whether it needs work.

Should you use a 5% or 10% deposit for a terrace purchase?

Most first home buyers purchasing a terrace use either a 5% or 10% deposit. If the property value falls within the price caps for your city, the Australian Government 5% Deposit Scheme lets you buy with just 5% down and no lenders mortgage insurance. Sydney properties under $1,500,000, Melbourne under $950,000, and Brisbane under $1,000,000 are covered under the scheme. Regional caps also apply. You apply through a participating lender, not directly through Housing Australia.

A 10% deposit can sometimes give you access to a wider range of lenders and slightly lower interest rates, but you will still pay lenders mortgage insurance unless you qualify for a waiver or guarantee program. If you can comfortably save the extra amount without delaying your purchase by more than six months, a 10% deposit can open up more home loan options. If saving that extra amount pushes your timeline out by a year or more, the 5% deposit path usually makes more sense, particularly if property values are rising in your target area.

How strata versus freehold classification affects your borrowing capacity

The classification of a terrace matters because lenders treat strata properties differently from freehold properties. A terrace on its own title with no shared walls or services is treated as a freehold house. A terrace that shares a wall, roof, or services with another property and falls under a strata or community title is treated more like a unit.

Lenders apply stricter borrowing capacity rules to strata properties. They factor in strata levies as an ongoing expense, which reduces how much you can borrow. Some lenders cap their exposure to certain postcodes or building types, which can mean a smaller loan amount even if your income and deposit are strong. Freehold terraces do not carry strata levies, so your borrowing power is usually higher. The property also tends to hold value more reliably over time, which gives lenders more confidence.

Consider a buyer looking at a terrace in Newtown, Sydney. If the property is strata titled with quarterly levies of $1,200, that adds $400 a month to their committed expenses. On an income of $90,000, that levy alone could reduce their maximum borrowing amount by around $60,000 to $70,000 depending on the lender. If the same buyer targets a freehold terrace with no levies, they can borrow more and have a wider range of properties within reach.

Combining stamp duty concessions with the 5% deposit scheme

You can usually combine state stamp duty concessions with the Australian Government 5% Deposit Scheme. New South Wales offers full transfer duty exemption on properties up to $800,000, with a sliding concession up to $1,000,000. Victoria provides full exemption up to $600,000 and a concession to $750,000. Queensland offers nil transfer duty on established homes up to $700,000, with concessions to $800,000.

In a scenario where you are buying an established terrace in Footscray, Melbourne, valued at $600,000, you would qualify for the full Victorian stamp duty exemption and could use the 5% deposit scheme to purchase with $30,000 down. The government guarantee covers the gap between your 5% deposit and 20% of the property value, so no lenders mortgage insurance applies. You save thousands in upfront duty and avoid paying LMI, which would otherwise add another $15,000 to $20,000 to your costs.

Help to Buy is another federal option if your income is under $103,000 as an individual or $165,000 for single parents or joint applicants. The government takes an equity stake of up to 30% for an established home, which means you need a smaller loan. You cannot combine Help to Buy with the 5% deposit scheme, but you can still use it alongside applicable stamp duty concessions in most states.

Fixed or variable rate for a terrace purchase

Your choice between a fixed interest rate and a variable interest rate depends on how long you plan to stay in the property and whether you want repayment flexibility. A fixed rate locks in your repayment amount for a set term, usually one to five years. A variable rate moves with the market and usually comes with features like an offset account or extra repayment options.

Terraces often appeal to buyers who plan to stay for five to ten years before upgrading to a house with more space. If that describes your situation, a split loan structure can work well. You fix part of your loan to protect against rate rises during the first few years and keep the rest variable so you can make extra repayments or use an offset account. This approach gives you stability without locking away all your flexibility.

If you are buying a terrace that needs renovation work over the next few years, a variable rate with redraw or offset gives you the ability to pull funds out or reduce interest by parking savings in the offset. Fixed rates generally do not allow unlimited extra repayments, and break costs can apply if you need to exit the fixed term early. We regularly see buyers choose a variable rate when they know they will be doing staged renovations or may refinance within two to three years.

What first home buyer grants apply to terrace purchases

First home buyer grants generally apply only to new homes, not established properties. If you are buying an existing terrace, you will not qualify for the First Home Owner Grant in most states. New South Wales, Victoria, Queensland, South Australia, Western Australia, and Tasmania all restrict their grants to new builds or substantially renovated homes.

The Northern Territory is the exception. It offered a $10,000 grant for established homes, but that ended in September last year. The current HomeGrown Territory Grant of $50,000 applies only to new homes. If you are buying a newly built terrace or one that has been completely renovated to meet the definition of a new home under your state revenue office rules, you may qualify for a grant. The definitions vary, so it is worth checking the specific wording in your state before assuming you are eligible.

Stamp duty concessions, on the other hand, apply to both new and established homes in most states. That makes them far more relevant for buyers looking at older terraces in inner-city suburbs where most stock is established. The value of the concession often exceeds the value of the grant, particularly in Sydney, Melbourne, and Brisbane where duty on a $700,000 purchase would otherwise be $25,000 to $30,000.

How condition issues affect loan approval on older terraces

Older terraces in inner suburbs often come with weatherboard cladding, original timber floors, and heritage overlays. Lenders will order a valuation before approving your home loan application, and the valuer will note any structural concerns, damp issues, or major repairs needed. If the valuer flags significant defects, the lender may reduce the amount they are willing to lend or require you to get a building inspection and a quote for repairs before settlement.

Some lenders will not lend at all on properties with certain cladding types or those identified as having structural movement. Others will lend but apply a higher interest rate or require a larger deposit. If you are using the 5% deposit scheme, the property still needs to meet the lender's standard valuation criteria. A terrace that needs major underpinning or has extensive rising damp may not be approved even if the purchase price falls within the scheme caps.

In our experience, buyers who get a pre-purchase inspection before making an offer avoid this issue. You know what repairs are needed, you can factor them into your budget, and you can discuss them with your broker before applying for pre-approval.

Call one of our team or book an appointment at a time that works for you. We will walk through your deposit options, show you which lenders suit your situation, and help you work out whether a terrace purchase fits your borrowing capacity and timeline.