Explore Home Loans

Whether you’re a first home buyer or you’re just looking to move or refinance, you might feel a little spooked by the sheer number of different types of home loans available to the prospective homeowner. There’s good news though – once you know how they all work, figuring out which type of home loan is right for you becomes much easier.

So, let’s go over the different kinds of home loans that are commonly available to the average individual, including how they work and a brief overview of their respective pros and cons.

NB: Some of the topics we discuss here aren’t technically a ‘type’ of home loan so much as a specific purpose or repayment structure, so we have omitted pros and cons lists for those entries.

Fixed, variable and split rate home loans

Fixed rate home loans

Fixed rate home loans are home loans that come with a stipulated period, usually between one and five years, during which the interest rate is locked in and cannot change.

After the fixed interest rate period ends, the home loan’s interest rate will typically revert to the lender’s standard variable rate, which can be noticeably higher than the market average variable rate.

Fixed rate loans usually come with fewer feature offerings than some other types of home loans, but not having to pay for said features means fixed-rate mortgages can be a low cost loan option.

  • Fixed repayments make budgeting easier
  • A more bare-bones feature offering generally makes for cheaper fees
  • Offers protection against interest rate increases
  • Often have restrictions on making extra repayments
  • A lack of features can make it harder to get value out of your home loan
  • If rates go down, you won’t benefit from these lower rates
  • You’ll typically incur steep break costs if you want to change home loans or sell the property during the fixed rate period

Variable rate home loans

Conversely, variable rate home loans are home loans with interest rates that – as their name suggests – vary. This usually happens in line with the Reserve Bank of Australia’s (RBA) cash rate announcements, with variable interest rates moving up or down to follow the movements of the cash rate over the life of the loan term. That being said, lenders have the freedom to change their variable rates at any time, not just when the RBA changes the cash rates.

This can be a bit of a double-edged sword. If the cash rate goes down, so might your home loan interest rate, and with it, your home loan repayments. But if the cash rate goes up, the size of your home loan repayments goes up with it.

However, variable rate home loans compensate for some of that unpredictability by generally having a broader feature offering than their fixed-rate counterparts. Features like mortgage offset accounts and redraw facilities are common options to have on variable rate home loans, but these features can come at a cost, generally a higher annual fee.

  • If the cash rate goes down, so might the size of your repayments
  • You’ll generally have access to a wider range of features
  • Typically don’t have any limitations on making additional repayments
  • If the cash rate goes up, your home loan repayments will generally get bigger
  • You’ll typically pay a higher annual fee for features like an offset account or redraw facility
  • A varying repayment size could make budgeting trickier

Split rate home loans

Split rate home loans offer a ‘best of both worlds’ solution, by letting you split your home loan into two components: one with a fixed rate and one with a variable rate. This can help you hedge your bets by ensuring that at least part of your home loan is safe from interest rate fluctuations. Much like a fixed rate home loan, your entire home loan will generally revert to a variable rate at the end of a stipulated period.

With a split loan, you can afford yourself a measure of security knowing that the interest rate and repayment size on your fixed rate component won’t be changing during the fixed period.  And while the variable rate component is susceptible to interest rate hikes, you’ll typically feel that pocket pinch to a lesser degree because it’s only being applied to part of your home loan, rather than the whole thing. Furthermore, you still get to benefit from falling interest rates, just to a lesser extent.

  • Allows some protection against interest rate hikes
  • You’ll generally be able choose the split of your home loan  (e.g. 60% fixed and 40% variable)
  • You’ll usually be able to make additional repayments on the variable rate component
  • You’re unable to fully benefit from decreased interest rates
  • You may incur multiple discharge fees if you refinance or otherwise change home loans
  • Break fees may apply on the fixed-rate component

Owner-occupied vs investment home loans

Owner-occupied home loans

The term ‘owner-occupied home loan’ refers more to the purpose of the loan (i.e. buying a residential property that you’ll call home) rather than its actual nature as a financial product. For example, you could have a fixed-rate owner-occupied home loan, a variable-rate owner-occupied home loan or a split-rate owner-occupied home loan. It’s more about what the loan’s for rather than how the loan works.

So, it’s hard to give the pros or cons for owner-occupied home loans, as they’re not an actual product. Be sure to do your own research on the different types of home loans in order to find a valuable owner-occupied home loan that works for you.

Investment home loans

Like their owner-occupied counterparts, investment home loans aren’t a specific type of home loan product, in the sense that almost all of the other types of home loans on this list could technically be taken out as an investment home loan. An investment loan is simply a home loan used to purchase a property for investment purposes rather than residential purposes.

While some aspects may vary, there are no general or overarching pros and cons to discuss for investment loans. Instead, if you’re considering taking out an investment home loan, you’ll be better-served by deciding what type of home loan you might want to take out, and then looking at its pros and cons as listed on this page.

Principal & interest vs interest-only home loans

Principal & interest home loans

A principal & interest (P&I) home loan is any type of home loan in which your home loan repayments have both a principal component and an interest component. This means that, unlike interest-only home loans, your home loan repayments are going towards paying off both your home loan principal (the amount you initially borrowed) and the interest it accumulates.

A P&I home loan isn’t a specific product so much as a repayment structure for whatever type of home loan you end up taking out. Generally speaking, most types of home loans will be P&I by default, or at least offer P&I as a repayment option. However, be sure to do your own research and make sure that any home loan product you’re looking at has a P&I option if that’s what you’re looking for in a home loan.

Interest-only home loans

An interest-only home loan is a home loan in which you’re only required to pay off the interest accumulated on your home loan principal for a set period of time (e.g. five years). When you make your home loan repayments, you’ll only have to pay interest accrued on your principal for the period, as opposed to making standard principal and interest repayments.

Interest-only home loans can be an option worth considering for those looking to maximise the value they receive from an investment property. By deferring your principal repayments, you can potentially invest those funds elsewhere, as well as potentially reap a slew of tax benefits to boot – and the value of your investment property might even increase in the meanwhile.

However, this is a very complex investment strategy, so you may want to speak to a mortgage broker or financial advisor before committing to an interest-only home loan.

  • Lower repayments as you are only paying the interest
  • Gives you space to save or cover other major expenses
  • Can be a prudent option for those with investment properties when it comes to cashflow and tax benefits
  • Your interest payments won’t make any progress on paying off your loan principal
  • Reverting to principal and interest repayments may be a shock to your budget

Some less common home loan types

Low doc home loans

Getting a traditional home loan can be tricky for self-employed individuals, who often lack the traditional documentation and payslips necessary to be vetted and approved for a loan. Low documentation home loans, commonly known as low doc home loans, offer a solution for these kinds of borrowers.

Contrary to what the name might imply, low doc home loans don’t always require less documentation. Some lenders will still ask you to provide extensive evidence of your income, but in a different form; for example, a self-employed individual might be able to offer a year or two’s worth of invoices, tax returns and bank records as evidence of their income.

Lenders that offer low doc home loans may require a bigger deposit or charge a higher interest rate, or both. This is because low-doc borrowers are generally viewed as high risk due to their non-conventional employment situations.

  • Provides a valuable option for those who may struggle to get a home loan otherwise
  • You may require a larger deposit in order to take out a low doc home loan
  • Low doc home loans typically come with a higher interest rate
  • The lender may charge additional fees on its low doc home loans

Non-conforming home loans

‘Non-conforming’ is a catch-all term for home loans that don’t conform to conventional home lending criteria. Non-conforming home loans are generally aimed at those with poor credit or unique employment situations, who may struggle getting a conventional or ‘prime’ home loan.

While non-conforming home loans can be an invaluable (and potentially only) option for those unlikely to be approved for a conventional home loan, they’re not a free ride. While non-conforming home loans work relatively similar to their prime counterparts (e.g. a fixed rate non-conforming home loan won’t look too different from a fixed rate prime home loan in terms of functionality), they typically come with a higher interest rate and higher fees. These inflated costs theoretically cover the extra risk you pose as a borrower.

A non-conforming home loan could be an avenue worth exploring for those with a less than stellar credit history or a non-conventional employment situation, but it’s crucial to be aware of the terms and conditions of a loan before committing to anything.

Construction home loans

If you’re looking to build a new house or substantially renovate an existing property, a construction loan could be the right type of home loan for you.

Construction home loans are essentially what they sound like: instead of lending you money to buy a home, you’re lent money to build a home. This type of home loan typically has a progressive drawdown structure, which basically means you don’t get the full balance of the home loan all at once as a lump sum, and you withdraw instalments in line with your construction timeline to pay your licensed builder for the work they’ve completed at each stage of the construction process.

The repayments on a construction home loan are commonly interest only until the construction is complete; however, some lenders will allow you to make P&I repayments. The amount you’ll repay will vary, as the size of the loan will be different at each draw down period, and subsequently incur a varying amount of interest. Note that your interest rate may be high during the construction period, before lowering once construction has been completed.

Bridging loans

A bridging loan is a form of short-term finance designed to help those looking to buy a new home without having yet sold their current home. This can be a handy option for prospective homebuyers who’ve found the home they want to move into but haven’t found a buyer for the home they currently live in yet.

However, these loans tend to come with higher interest rates, and once you’ve sold your old home, you’ll generally have a short, stipulated period within which to pay off the bridging loan. Depending on how much of your new home’s value you borrowed with your bridging loan, that could potentially put a serious squeeze on your finances.

  • Allows you to move house without having sold your existing home yet
  • Helps you avoid having to rent or find some other sort of stopgap measure in-between houses
  • Depending on your lender and the specificities of your bridging loan, you may only be required to make repayments towards your current mortgage during the bridging period
  • Often comes with higher interest rates than standard home loans
  • You may not end up having the luxury of choice when it comes to the price you sell your home for
  • If your house doesn’t sell at all, you could run into some serious financial difficulties, especially with the higher costs attached to bridging loans

Line of credit home loans

A line of credit home loan allows homeowners to turn their mortgage into a revolving credit facility, akin to a credit card in many ways. With a line of credit home loan, you’ll typically be able to borrow up to a set amount which based on and secured against the equity you’ve built up in your home. This can be useful for cash flow purposes, especially if you’re eyeing off a second property or planning renovations to your current property.

Having quick and easy access to credit without having to apply for it every time you want to make a withdrawal can be handy, but it’s worth noting that you’ll generally be charged interest on the withdrawals you make. This interest can typically be either paid off via your regular home loan repayments, or capitalised and added to your home loan balance.

Line of credit home loans can be an option worth considering for those looking to renovate their home or invest in property. But like any financial product or credit facility, it’s an option that should be considered thoroughly and at length before being committed to.

  • Can be an invaluable cash flow management tool
  • Gives you access to your own money in the form of a revolving credit facility
  • You can generally arrange to have your salary deposited straight into the line of credit account, or build up savings within it
  • Often comes with a higher interest rate than standard home loans
  • The interest charged on the amounts you withdraw could add up quickly if you’re not careful
  • Can be harder to get approval for than more common home loan types

Reverse mortgage

Reverse mortgages, sometimes also known as retirement home loans, are a type of home loan that allows the homeowner (usually a retired individual) to access the equity in their home in the form of cash withdrawals, a line of credit, a lump sum or a mix of the three (up to a certain percentage of the home’s value). This type of home loan, while professing some advantages, are complex, risky  and not suitable for everyone.

While reverse mortgages can be handy for retirees who’ve incurred significant medical or general living expenses and need cash to cover them, withdrawing your equity means you increase the amount you owe on your home loan.

However, the loan will generally be paid off when you or your estate sell off the property, so, notwithstanding the various disadvantages associated with reverse mortgages, you typically won’t have to worry too much about leaving any debt to your next of kin. Keep in mind, however, that the interest on your loan will compound over time, especially as those with reverse mortgages typically aren’t making any repayments towards the principal of the loan.

This can be especially problematic for older Australians, since the window to repay any outstanding debts is significantly smaller, as is most people’s ability to earn money. However, for those in severe financial need or planning on downsizing anyway, a reverse mortgage can be an invaluable financial tool.

  • Gives retirees access to valuable cashflow via their equity
  • Can be a lifesaver in the event of significant unexpected costs
  • Reduces the equity you have in your home
  • Increases your level of debt at the point in your life where you’re least likely to be able to pay it off
  • Risky and complicated, you’ll need to be especially careful to get the right advice
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