There’s no shortage of choice when it comes to types of home loans available in the Australian marketplace, with lenders keen to cater for as wide a range of the community as possible. Here’s a quick guide to the mortgage options currently available and who they are best suited to.
Types of Home loans for buyers
1. Standard variable rate home loan
A standard variable rate home loan is where the interest rate is constantly changing in line with the Reserve Bank’s official cash rate, meaning a mortgagee may have lower payments when rates fall and higher regular repayments when interest rates rise. The majority of home loans in Australia are standard variable rate loans.
- Can take advantage of the times when interest rates are low.
- The account comes with redraw and offset facilities, which aren’t available on fixed-rate mortgages.
- Can make unlimited repayments to pay out mortgage early without attracting penalties.
Who it’s best for: First homebuyers, anyone who wants to maximise the features of their loan to pay off their mortgage faster and cheaply as possible.
What to watch out for: Although variable loans are a popular choice, they could create a challenge when it comes to planning and budgeting to cover loan repayments as repayments can fluctuate considerably.
2. Honeymoon rates (introductory home loan)
An introductory home loan, also known as a honeymoon rate, is where the lender offers a fixed lower interest rate than the standard variable rate for the initial phase of a mortgage, usually 12 months. At the end of the introductory period, the loan reverts to the variable rate.
- The introductory interest rate should be one of the lowest available on the market.
- First homebuyers can use the money saved to increase repayments off the principal.
- Some lenders offer redraw and offset facilities in introductory home loans.
Who it’s best for: Anyone who wants to save money by getting a lower home loan interest rate, even for only 12 months.
What to watch out for: When the honeymoon period ends, you might find yourself locked into a higher interest rate than other loans available in the market at the time.
» Make sure to study the actual cost: A comparison rate represents the real cost of the home loan
3. Interest-only home loan
An interest-only home loan is one where you pay back only the interest on the loan, as opposed to a standard principal and interest loan. They are usually only available for the first five years of a mortgage.
- Repayments are lower than for a principal and interest loan.
- The money saved could be reinvested elsewhere for better returns.
- Investors can gain tax benefits from the interest payments being offset against rental income.
Who it’s best for: Interest-only home loans are for homebuyers and investors who want to pay less in repayments over the first years of their mortgage so they can reinvest their savings in a potentially more lucrative venture.
What to watch out for: Before signing up for an interest-only loan, it pays to do your sums to ensure you will be able to cover the extra repayments once your interest-only period comes to an end.
» MORE: Learn the basics of how home loan interest rates work
4. Fixed-rate mortgage
A fixed-rate mortgage is one where the interest rate is fixed, or locked in, for a set period at the start of a mortgage, which is a maximum of five years in Australia, before the loan reverts back to a variable rate loan.
- You save money by locking in a lower interest rate than the standard variable rate.
- Certainty of knowing exactly what your repayments are for the fixed period.
- You can budget without worrying about interest rate rises.
Who it’s best for: A fixed-rate home loan is best for those who want consistency with their fortnightly or monthly repayments and can put the money they save to good use during the fixed-rate period.
What to watch out for: Taking out a mortgage with a fixed interest rate can give you peace of mind, but remember that you won’t be in a position to benefit from rate reductions, as your repayments are tied into the fixed rate you originally signed up for.
5. Split-rate loan
A split-rate loan, as the name suggests, consists of both fixed and variable rate components for a set period of time. As the mortgagee, you can usually decide what percentage of your mortgage you wish to allocate to either rate.
- Provides some insurance against interest rate rises as the fixed part of the loan isn’t affected.
- Offers the ability to make extra repayments on the variable portion of the loan.
- Lets you access benefits, such as redraw and offset facilities, in the variable part of the loan.
Who it’s best for: Those that want to hedge their bets in case of rate rises while also utilising the benefits that come with a variable loan.
What to watch out for: With these types of loans you have to be prepared to take the good with the bad – part of your loan is protected from rate hikes. Conversely, should rates drop significantly, only part of your loan can take advantage of the lower costs.
6. Guarantor home loan
A guarantor home loan is when a would-be first homeowner gets another property owner, usually a family member but not always, to guarantee part of their property as a surety for their loan.
- Helps first homebuyers get into the market sooner as they only need a small deposit or no deposit at all.
- Helps you avoid lenders mortgage insurance.
- Your lender may offer better terms and conditions once they have the added surety of a guarantor.
Who it’s best for: First homebuyers struggling to get a deposit together who have a reliable and financially solid family member or friend who can help them out.
What to watch out for: A guarantor can make it possible for you to purchase your dream home with a small deposit, but it also means the loan could end up costing you more because you’re paying interest on a larger-than-normal portion of the property’s value. On the flip side, if you’re thinking of going guarantor, remember that doing so can impact your ability to take out a loan for yourself.
7. Non-conforming home loan
Non-conforming loans are designed for people who may struggle to get a regular loan because they are perceived as high risk due to poor credit history or missed payments on other loans.
- Offers those with a poor credit history a chance to enter the property market.
- Provides the opportunity for refinancing after an agreed-upon period.
- Offers some of the benefits of standard variable loans, such as redraw and offset facilities.
Who it’s best for: Anyone who has had a chequered financial past and may find it hard to get a different type of loan. You can apply for a non-conforming loan once you have a proven record of savings or can at least show an ability to make regular mortgage repayments.
What to watch out for: Although these loans offer a way into the property market, it pays to know that to offset your high-risk status, you’ll need to save up a larger deposit and pay a higher interest rate than for a traditional loan.
8. Low-doc /alt doc loan
A low-documentation loan, also known as an alternative documentation loan, is for would-be borrowers who find it difficult to provide the type of paperwork required for a standard home loan. In this case, lenders will consider different types of documentation for suitability purposes.
- Gives those without standard loan documentation a chance to enter the property market.
- Allows for the possibility of a mortgage refinance after an agreed-upon period.
- Some low-doc loans offer redraw and offset facilities.
Who it’s best for: Sole traders, the self-employed, contractors — basically anyone who doesn’t get a regular payment from an employer or who may not have extensive tax records or credit history.
What to watch out for: You’ll likely pay a higher interest rate for this type of loan and have less opportunity to shop around for the best deal because not every bank or lender offers low-doc loans.
9. Age and disability home loans
Age and disability home loans are provided by lenders to those who may find it difficult to find a home loan otherwise because of their age or a physical disability. Lenders will sometimes offer unique terms and conditions for people in these categories.
- Gives pensioners an opportunity to enter or re-enter the property market.
- They also provide those with a disability a chance to achieve home ownership.
- The possibility to refinance the loan after an agreed-upon period.
Who it’s best for: Age and disability loans are good for pensioners with a solid financial footing or for those with disabilities who may also have a good financial track record but may not receive regular payments from an employer or have an extensive credit history.
What to watch out for: These loans can provide more opportunities to get into the property market but bear in mind that in most cases lenders consider a disability pension to be income and treat the application in the same way as other home loans.
10. Construction home loan
A construction home loan is designed for those building a house to make ongoing payments throughout the construction process. Unlike a regular home loan, a construction loan allows the borrower to draw down on the loan balance, as opposed to receiving the entire loan amount in one lump sum.
- Loans may be interest-only during construction.
- Flexible loan terms that may be renegotiated.
- The drawdown facility helps you keep track of your spending.
Who it’s best for: A construction home loan is there specifically for someone who wants to build a new house or is undertaking major renovations to an existing property, but not buying an established property.
What to watch out for: Be prepared to provide a lot of paperwork, such as building plans and a schedule, forms from a certified contractor and so on.
11. Owner-occupier home loan
An owner-occupier home loan (or live-in home loan) is a loan where the mortgagee lives in the property after they have purchased it. It is the opposite of an investment loan, where the owner rents out the property instead of living in it.
- Lets you build wealth by owning your own property.
- You acquire equity, which you can use to build financial freedom.
- No longer have to pay rent, which is effectively money down the drain.
Who it’s best for: Everyone who wants to own the property they live in and build wealth as opposed to paying rent all their lives.
What to watch out for: If you decide to rent out your home at some point, you will need to apply to change to an investment loan. Failing to do so can result in being charged with occupancy or mortgage fraud.
Types of Home loans for investors
12. Investment loan
An investment loan is for a property that the owner is planning to rent out to earn a regular passive income, unlike an owner-occupier loan where the owner lives in the property. Investment loans are usually given out to existing homeowners who can use their existing property or properties as collateral.
- Gives existing homeowners an opportunity to build more wealth.
- Comes with certain tax breaks.
- Loans come with features, such as interest-only and line-of-credit, offset and redraw facilities.
Who it’s best for: Investment loans are for anyone who wants to create and build wealth through property. Real estate is one of the best-performing asset classes for investment in Australia and has been for some years.
What to watch out for: You’ll need to continue making loan repayments even in the event that your investment decreases in value. According to Moneysmart, you should think twice about borrowing to invest unless the after-tax returns are greater than the costs of the investment and the loan repayments.
13. Self-managed super fund (SMSF) home loan
An SMSF home loan is where your self-managed superannuation fund borrows money to invest in property.
- Gives retirees the opportunity to profit from a well-performing property market.
- Provides some tax incentives for property investors.
- Loans can be structured like normal home loans.
Who it’s best for: Those with an SMSF who want to put their retirement savings towards owning property for investment purposes.
What to watch out for: SMSF loans involve very strict borrowing conditions and tend to be more expensive than standard loans. And, although you can use your super to purchase a property, you can’t use it to renovate or maintain it, so ensure you will have sufficient funds to cover those costs well into your retirement without leaving you short.
Types of Loans for homeowners
14. Refinance home loan
A refinance home loan is where you refinance the terms of your loan with your lender by paying out the current loan and starting a new one. Refinancing is used to improve the terms and conditions of loans if you are moving from a low-doc or non-conforming loan to a standard variable loan, for example.
- Great for getting a better lender deal once your financial conditions improve.
- You can shorten the term of your loan once your home has been revalued.
- The money saved from a better interest rate could be used to repay the mortgage sooner.
Who it’s best for: Anyone wanting to renegotiate the terms and conditions of their mortgage with their lender. You can ask to refinance after making regular payments for a period of time or after getting a property revaluation.
What to watch out for: It can come as a surprise that you have to submit a full application when refinancing your loan. If your circumstances have changed, such as reduced income, and your application is unsuccessful, this will be reflected in your credit history.
15. Line of credit home loan
A line of credit home loan gives mortgagees access to the equity built up in their property by drawing down funds as required.
- Provides access to funds for anything from medical emergencies to a new car, holiday or renovations.
- Allows you to pay back the line of credit in either interest-only or principal and interest instalments.
- The line of credit process is usually straightforward, requiring less paperwork than getting another loan.
Who it’s best for: Those who are comfortable using the equity in their property for cash withdrawals.
What to watch out for: If you’re not great at money, steer clear of this type of loan because you’re in danger of losing equity or the property if you can’t meet repayments.
16. Reverse mortgage
A reverse mortgage is a facility that allows those aged 60 and over to borrow money by using the equity in their home as security. The maximum amount available is usually 15-20% of the property’s value if you’re 60 and 1% more for every year after that. So if you’re 70 you can borrow 25-30% of your property’s value.
- Makes cash available to pensioners to help fund their retirement.
- You can remain in your home without having to sell.
- No regular repayments are necessary, leaving more monthly cash available.
Who it’s best for: Retirees and pensioners who want to access the equity in their home for anything from an extended holiday to home renovations and are happy to go back into mortgage debt in exchange for the funds.
What to watch out for: Tread carefully with a reverse mortgage because once you exhaust your home equity, if you live to a ripe old age, there might not be much left to fund your retirement.
17. Bridging home loan
A bridging home loan is a short-term loan that allows you to buy a property to live in before you have sold your existing property. The time period for bridging loans in Australia is usually six months maximum.
- Good for those who need urgent funding to buy a property and can’t wait for the sale of their existing home.
- Provides convenience by allowing you to move into your new home without having to pay rent.
- Some lenders offer interest offset features.
Who it’s best for: Those who need money urgently and don’t want to miss out on the opportunity to purchase a particular property while still waiting for the sale of their existing property to occur.
What to watch out for: Think carefully before taking out a bridging loan because they cost more than regular loans. If your house takes longer to sell or sells for less than expected, it could lead to financial stress.
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