Types of home loans in Australia

In Australia, there are plenty of different home loans available to cater to different borrowers. Below, we break down the main types of home loans out there to help you find the one that suits your financial situation.

When looking for a home loan, figuring out the kind of interest rate that works for your situation is an important first step. 

1. Variable interest rate

The more popular home loan option in Australia are variable rates. These  rates can be hiked at the provider's discretion, but usually change in response to the RBA decision on whether to hike, hold, or cut the cash rate. 

Because they can change immediately though, variable rate loans can offer more flexibility. You’ll be able to take advantage of features like an offset account to help save on interest, as well as switch to another provider without incurring any break costs (as you would with fixed rate loans).

If you’re leaning towards a variable rate home loan, make sure you understand how your repayments will be affected in the event of a rate hike. Punch in your details into a rate change calculator to get an idea.

2. Fixed interest rate

If a variable rate loan isn’t right for you, you can opt for a fixed rate instead. This locks your interest rate at a set amount for a period of between one to five years (though some lenders offer terms as long as ten years).

The biggest drawcard of a fixed rate loan is that your repayments will remain consistent for the duration of the term. This makes this type of home loan popular for first home buyers and those on a strict budget.

Just be mindful that fixed rates are typically more expensive than variable rates. That’s because lenders consider where the interest rate environment is heading when pricing their fixed rates and try to get ahead of the curve.

3. Split interest rate

If you’re finding it hard to choose between rates, you can consider splitting your loan. This involves dividing your loan into two (or more) accounts, one with a fixed rate and one with a variable rate.

The size of each portion will be up to you. For example, if you opt for a 60:40 split on a $500,000 home loan, $300,000 would be subject to a fixed rate while $200,000 would be subject to a variable rate.

The portion you lock in won’t be impacted by any changes in the market, while the variable portion will allow you to take advantage of features that aren’t typically available on a fixed rate loan, such as an offset account.

4. Interest only loans

One method of bringing down your monthly repayments is opting for an interest only loan, which will only require you to pay down the interest for a set period. 

This is a popular type of home loan for investors, as negative gearing means you may be able to get a refund on the interest when putting through your tax return.

It also bears mentioning that interest only periods don’t last forever (usually up to 7 years) and you will need to start paying down both the interest and principal after the interest only term comes to an end.

While lenders generally require a deposit of at least 20% the property’s value, many won’t rule out lending to borrowers with a much smaller deposit. They just require you to purchase lender’s mortgage insurance (LMI).

LMI protects the lender if it turns out you can’t repay the home loan. Depending on the purchase price and the size of your deposit, it can cost you anywhere from thousands to tens of thousands of dollars.

1. Low deposit loans

A low deposit home loan is when a provider lets a borrower take out a loan with a deposit that is below the <20%. These usually range between an LVR of 85-95%. 

If you are eligible for the Family Home Guarantee (FHG) however, there are a few providers on our database that offer home loans with deposits as small as 2%. 

2. Guarantor loans

Many first home buyers ask a family member to go guarantor to avoid paying LMI and improve the chances their loan is approved. However, instead of LMI, a portion of the guarantor’s home is used as security for the loan instead.

While this type of home loan has its advantages (as you’ll get into the property market sooner), you and your guarantor should always weigh up the risks involved before signing up as guarantor. 

The purpose of your home loan can influence the type a provider will offer you. Here are some of the specific home loan types you might find: 

1. Investment loans

Owner-occupiers and investors require different types of home loans. If you intend to live in the property you’ll be considered an owner occupier, whereas if you plan to rent it out or flip it you’ll be considered an investor.

Since investors are considered higher risk, the rates tend to be a bit higher. Banks also face pressure from APRA to keep the share of investors on their loan books within a healthy range.

So if you’re an investor with a low deposit (and therefore a higher loan-to-value ratio), you may face a steeper rate than someone purchasing as an owner occupier. To see which loans are investor friendly, browse our investment loans hub.

2. Construction loans

Borrowers looking to build their home rather than purchase an established one can take out a construction loan. This differs from a conventional home loan in a few key ways. Firstly, funds are made available in instalments as your home is being built and are paid directly to the builder, not to you.

Secondly, you’ll only pay interest on the loan, at least until the construction process is complete. Interest will only be charged on the amount that has been released by your lender so far. So if you’ve drawn $50,000 on a $300,000 loan, interest will only be charged on that $50,000.

3. Green home loans

If you’re part of the large number of Australians who want to make their homes more green in order to fight against the climate crisis, a green home loan may be a good choice for you.

A green home loan is a specialised loan for borrowers who want to purchase or build an environmentally friendly home. You’ll need to comply with the lender’s sustainable home criteria before you may qualify for their green home loan.

4. Low doc home loans

If you’re self-employed or work as a freelancer, you probably don’t have the same documentation other borrowers are required to provide when applying for a loan.

A low doc home loan lets those who aren’t salaried employees apply for a home loan without the standard paperwork, at a cost in the form of a higher interest rate. Some documentation will still be required (such as a business activity statement and a borrower’s income declaration).

If you want a range of flexible features, then you can opt for a home loan with all the bells and whistles. Just keep in mind you’ll usually be charged higher interest rates and fees. Here are some of the common features to keep an eye out for:

• Offset account: This is a great feature for bringing down the amount of interest you pay, as any money in the account will be offset against the principal of the loan. So if you have a balance of $30,000 in your offset account and $500,000 owing on your mortgage, you would only pay interest on $470,000.

• Extra repayments: Another way to bring down the interest charged is by making additional repayments on top of the minimum amount required by your lender.

• Redraw facility: If your circumstances change and you need a little cash, a redraw facility will let you access any extra repayments you’ve made on your home loan.

• Home loan top up: If you need money for things like a home reno or new car, a home loan top up will let you borrow additional funds against the equity you’ve built up in your property.

Kick things off by heading to our home loan comparison page, where you’ll be able to filter your search by rate and type. You can also browse the selection below for an idea of what’s currently available.