What are the types of home loans in Australia?

With so many different home loan options out there to choose from, it can be overwhelming trying to pick the right one that’ll suit your needs. 

If you’re scratching your head trying to find the perfect finance solution, here is an easy guide that goes through all the loan choices you have at your fingertips: 

Home loans for different types of property purchases 

Home loans can vary depending on the kind of property you want to buy or what you’d like to do with your home loan. The different home loan types based on purpose are: 

• Owner occupier home loan 
• Investment home loan 
• Construction home loan 
• Bridging home loan 
• SMSF home loan 

Owner occupier home loan 

As the name implies, an owner occupier home loan is for borrowers who will make the property their primary residence. With an owner occupier home loan, you’ll receive the payment in full once you’re ready to close on a home. After everything is settled, you’ll start repayments. 

Owner occupied home loans typically have lower interest rates than investment loans as the occupants are deemed less ‘risky’ than an investor and are more likely to hang onto the property. These home loans typically have a wider range of loan products available, as well.  

Investment home loan 

If you plan to rent out a property to tenants or flip it, you could get an investment property loan. This type of loan works similarly to an owner occupier home, where you’ll start repayments after the settlement of the property’s sale. 

Investment loans tend to have higher interest rates compared to owner occupied loans. This is because investors are considered ‘riskier’ borrowers than those buying a property to reside in. 

According to the Australian Tax Office, taking out an investment loan can have its benefits, as interest payments could be claimed as a tax deduction. However, investment home loans do usually have higher interest rates compared to owner occupied home loans. 

Construction home loan 

For those who plan on building a house or renovating, a construction home loan may be the best option. This type of home loan can be used by those who want to build their primary residence. Interest rates may differ depending on the purpose of the construction home loan. 

The major difference between a construction loan and a standard home loan is that the construction loan covers expenses throughout the building process as they occur. Each stage is paid separately to the builder at the time that stage is complete, known as progress payments. Once the construction is complete, your construction home loan will revert to a standard home loan. 

Bridging home loan 

A bridging home loan is a short-term loan that offers borrowers the option to buy a new home while in the process of selling their current one. With this type of home finance, the lender will take over the borrower’s current mortgage and provide funds for the purchase of their new property. 

Once the borrower has sold their current property, the proceeds of the sale will go into paying off the balance on their previous mortgage. The bridging home loan will become a standard owner occupier mortgage. Bridging home loans are a bit more complicated than the standard home loan, but they could offer advantages to those who want to move homes quickly.  

SMSF home loan 

SMSF home loans are for those who want to use their super fund to purchase an investment property. There are different kinds of SMSF loans, namely, SMSF residential home loans and SMSF commercial home loans. 

Take note, using your SMSF for an investment property purchase comes with strict guidelines and restrictions to be followed.  

Different interest rate types for home loans 

Home loans also come with different interest rate types. The interest rate on your home loan can significantly affect the repayment amount and the overall cost of your loan. The home loan interest types are as follows: 

• Fixed rate home loan 
• Variable rate home loan 
• Split home loan 

It’s important to understand how these interest rate types can affect your home loan so you can choose one that fits your financial needs best. 

Fixed rate home loan 

A fixed rate home loan means your loan repayments will be charged at the same interest rate for an agreed period, typically of 1 to 5 years. Lenders typically charge different rates for different time periods. For instance, they will have specific 2-year fixed home loan rates and 3-year fixed home loan rates. 

When the fixed term expires, the loan will revert to a variable rate home loan, unless you agree with your lender to fix the rate again. 

Pros of a fixed rate home loan 

• You are protected from any rate increases 
• Easier to budget with predictable repayment amounts 

Cons of a fixed rate home loan 

• Typically have a slightly higher interest rate 
• You won’t save any money if rates go down 
• More expensive to refinance due to potential break costs

Variable rate home loan 

A variable rate home loan is a home loan with a ‘variable' interest rate, meaning it can change at any time. Changes can happen in response to a change in the lender’s cost of funds. That could happen for many reasons, including a change in the Reserve Bank of Australia’s official cash rate, or a change in cost of funding, amongst other factors. This means your repayments can go up and down depending on whether your lender passes any changes onto you. 

Pros of a variable rate home loan 

• Typically has a lower interest rate 
• Potential to pay less if rates fall 
• More features like unlimited repayments 
• Less costly to refinance 

Cons of a variable rate home loan 

• Costs you more if rates go up 
• Harder to budget 
• Split rate home loan 

Split rate home loan

A split loan means that a portion of the loan is subject to fixed home loan rates and a portion is subject to a variable interest rate. For instance, you might fix 50% of the loan and leave 50% variable. This means that if rates go up, your repayment will only increase on the variable portion, while the other fixed half will remain the same. A split loan is a compromise between the pros and cons of fixed and variable interest rate loans. 

Pros of a split loan 

• Minimised risk for rate rises 
• More flexibility with more loan features available 
• Cons of a split loan 

Cons of a split loan

• Minimised advantages for rate falls 
• Break fees if you refinance during the fixed term 

Different repayment options for home loans 

In addition to interest rates and purchase types, you can choose how you’re going repay your home loan. You have the option of paying off your home loan’s principal amount and interest or paying interest only for a set time. 

Principal & Interest home loan repayments 

With any loan, you will ultimately need to pay back the amount you borrowed (the principal) plus any interest charged. When you do this in equal instalments through the loan, this is called “principal and interest” repayments. 

If you are paying down the principal on your loan with principal and interest repayments, your monthly repayment amount will start off higher compared to an interest only repayment type, but you will be paying down your principal over the entire life of the loan.  

Interest only home loan repayments 

Interest only repayments are a more common option for investors. This means that during the agreed interest-only period (typically between 1 and 5 years), you are only paying the interest on the loan and not repaying the principal. 

This means that your interest only repayments will be less than a principal and interest repayment.

However, once the interest only repayment period expires, you will have a shorter time of your loan term to pay back the principal owing, meaning your principal and interest repayments will be higher than if you had principal and interest repayments from the beginning of the loan. 

The total amount of interest you pay will also be higher because the balance outstanding on your loan (the principal) will be higher for longer. 

Need help finding the right home loan? 

With so many home loan options to choose from, finding the right one for your situation may be difficult. If you need assistance, get in touch with the friendly lending specialists at loans.com.au. Our team will be more than happy to guide you through your home loan options and find one that suits your needs best. Reach out by calling 13 10 90 or start your home loan application online today! 

Disclaimer: The information provided in this article is general in nature and does not constitute financial or legal advice. Please seek professional advice tailored to your circumstances before making any financial decisions.

Ready to start saving on your home loan?

Find out in under 2 minutes if you qualify for one of our low rate home loans.

Do I Qualify?