Types of home loans in Australia

The road to home ownership can feel pretty intense. There’s the excitement of starting a new chapter, but there’s so much jargon involved it can feel as if you’re learning a whole new language! Here, we explain the different types of home loans available to help you navigate the process with clarity and confidence.

A variable-rate loan is essentially determined by market conditions and the cash rate set by the Reserve Bank of Australia. This means that your minimum contracted repayments can fluctuate, going up or down, depending on interest rates.

The pros: flexibility and the option to make extra repayments.

The cons: uncertainty on when things might change.

A fixed-rate loan is one where the interest rate is locked in for a set period, usually up to 5 years (depending on the lender). When the period ends, you can lock in for another fixed-rate period, or move to a variable rate.

The pros: a set rate can make budgeting for repayments more manageable, and if you lock in your fixed-rate loan at a low rate, you’ll be largely unaffected by fluctuations in the market.

The cons: extra repayments may be limited or capped, and if you lock in at a higher rate, you’ll be stuck with it until the end of the fixed term.

A split loan is one that’s divided into different parts, where a portion of the loan is fixed, and the remainder is variable. When one part of your loan is fixed, it’s protected from interest rates going up. When one part is variable, you have more flexibility, with the ability to make extra payments, and potentially pay down that portion faster.

As you can probably guess, this option combines all the pros and cons of the above two options.

The type of loan you get can depend on what your intentions are for the property you intend to buy. An owner occupier loan is for people who plan to live in the property they’ve purchased, while an investment loan is for people buying a property they don’t intend to live in, but rather, rent out.

There are two ways of paying down your loan. Principal and interest repayments, and interest-only repayments. Let’s break it down.

Principal and interest repayments

With this arrangement, each time you make a repayment, you’ll be reducing both the principal amount of your loan (i.e. the amount you initially borrowed from the bank) as well as the interest that accrues from the day you took out the loan.

Interest only repayments

These repayments only cover the interest portion of the loan. It’s the option typically chosen by owners of investment properties for potential tax benefits (depending on your individual circumstances). The minimum repayments will generally be lower, because you’re not paying down the principal balance, but could mean paying more interest over the life of the loan.

Bridging loans: this is more of a short-term loan to help people purchase their next property. Basically, they’ve found a property and bought it, but haven’t sold their existing property yet.

Guarantor loan: common for first home buyers, this arrangement occurs when someone helps you secure a home loan, by agreeing to use their property as security for your mortgage.

When choosing a home loan, always consider your own personal needs and circumstances to make sure it’s the right option for you. Take time to weigh up all the different features, benefits and options, and if you’re unsure, seek advice from a financial planner or tax agent.