Types of Home Loans

You’re not short on options when it comes to finding the home loan to suit your needs

Last updated on April 20th, 2022 at 10:53 am by Thomas Perrotta

Learn about all the Types of Home Loans

Most homebuyers don’t realise that there are actually all kinds of home loans for different situations and scenarios until they begin the process. We’ll walk you through some of the most common types of home loans and how they might be able to help you.

What are the standard types of home loan I can choose from?

Fixed rate home loan
A fixed rate home loan allows you to pay your loan repayments back at whatever the fixed interest rate was at the time of settlement for the duration of the fixed term. Fixed terms, in general, range between 1 and 5 years. Even if the cash rate rises, you’ll still pay the same amount of interest with a fixed rate home loan. With a fixed rate home loan, you’ll know the exact amount that your loan repayments will be. It can be beneficial to get a fixed rate loan if you manage to lock in your home loan when it is at a low rate.

However, fixed rate home loans are known for their inflexibility in terms of moving outside of their rigid repayment structure. It’s rare that you’ll find a fixed rate home loan that won’t penalise you when making early or additional repayments, and you will usually have to pay a significant penalty if you break a fixed rate home loan term. Also, the fact that they’re protected from interest rate rises means that they’re also unable to take advantage of any market rate dips.

Variable rate home loan
This type of loan is perhaps the most flexible on the market for borrowers, as they are typically afforded the freedom to make extra payments on type of their regular repayment cycle without being charged a hefty fee. Variable rate home loans are much easier to switch out of than their fixed rate counterparts, making refinancing that much easier. Also, they often come with added features that can make your life much easier, like offset accounts (which allow you to make contributions to principal payments without paying interest) and redraw facilities (which allow you to withdraw funds from previous additional repayments made).

The trade-off for this flexibility is a lowered sense of certainty regarding repayments month to month. As the name suggests, the interest rate on a variable rate home loan is subject to fluctuation, meaning your repayments could change between instalments. It also means that an upward market trend could up costing you a substantial amount of money if you sign up for your loan at the wrong time.

See the table below for an outline about how these two types of loans could save you money in certain circumstances.

If variable rates rise

Starting interest rate Interest rate after one year Repayments Interest rate after 2 years Repayments Total repaid 3 year saving
Fixed Rate
3%
3%
$2,108.02
3%
$2,108.02
$75,888.72

$1,469.04

Variable rate
3%
3.15%
$2,148.68
3.3%
$2,189.78
$77,357.76
-

If variable rates fall

Starting interest rate Interest rate after one year Repayments Interest rate after 2 years Repayments Total repaid 3 year saving
Fixed Rate
3%
3%
$2,108.02
3%
$2,108.02
$75,888.72

-

Variable rate
3%
2.85%
$2,067.79
2.6%
$2,001.70
$74,130.12

$1,758,60

*Table estimates calculated using a $500,000 home loan to be repaid over 30 years. Each variable interest rate is calculated to remain the same over a 12-month period (e.g., 3% for first 12 months, 3.3% for the next 12 months, etc.). 

Split rate loan

Can’t decide between a fixed rate home loan and a variable rate home loan? A split rate home loan might be the solution you’re looking for.  With a split rate home loan, you divide you loan into multiple parts – a portion of your loan is fixed and the remaining portion is variable. The benefit of this is that you can enjoy some of the more flexible elements of a variable rate home loan, such as its features, while also bringing with it some level of security when it comes to what interest you’ll pay. Additionally, you’re able to decide the percentage split between fixed and variable.

It’s important to note that, like fixed rate home loans, split rate home loans can be difficult to exit early without forking out for a significant break fee. Also, if you get your split wrong (e.g., fix a bad rate or have a good variable rate increase), you can end up costing yourself a fair amount of money.

We’ve set out an example for you in the table below, based on a fixed portion of $50,000 over a period of three years:

 

Interest rate

Monthly repayments

Repayments after fixed period

Total repaid

Saving after fixed period

Fixed portion

2.8%

$205.45

$2,174.98

$782,592.83

$778.54

Variable portion

3.2%

$1,958.43

Total

N/A

$2,163.88

*Table estimates calculated using a $500,000 home loan to be repaid over 30 years.

Are there any other types of home loan?

Yes – you’re not limited to the standard options that vary based around their interest rates. We’ve listed a few other home loans that you might wish to pursue if your specific needs are slightly different to the average home loan applicant:

Construction loan

A construction loan may be suitable if you are building a new home or doing extensive renovations on a newly purchased property. Unlike standard home loans, construction loans are provided in a series of payments rather than one lump sum. This means that payments, known as ‘progress payments’, are provided after certain milestones have been reached during the construction process. Generally, you will only have to pay interest on the amount that has been drawn down from the loan balance, meaning payments will increase as more money gets used. Lenders often set a maximum timeframe, usually around six months, for the loan to be drawn down completely.

Low doc home loans

Low doc home loans (short for low documentation) are designed for self-employed workers or sole traders who aren’t able to show their income as easily without documents such as payslips. These would usually be crucial in the process of being approved for your home loan, so it can open doors for people who otherwise would’ve had their applications rejected. In terms of their function, they’re more or less the same as standard home loans, but will typically carry greater restrictions on loan-to-value ratios (LVR). Many lenders are only willing to grant funds worth a maximum of 60% of the property’s value for a low doc home loan.

 

Non-conforming home loan

Non-conforming home loans can also be suitable for self-employed workers, as well as low income-earning borrowers and/or those with a poor financial history. Like low doc home loans, this type of product presents itself as a pathway for people who don’t fit the conventional required criteria for lenders when looking to apply. Potential borrowers should note that interest rates, fees and required deposits can all be higher in these types of loans, though.

Bridging loan

A bridging loan is a type of short-term loan that allows you to purchase your new home before you’ve sold your current property. Generally, people will sell their home first before purchasing their next property but, in some cases, it may be advantageous or necessary to buy first before selling. It’s important to note that you will be obliged to pay your original home loan as well as the bridging loan at the same time and you’ll generally have six months to sell your existing home, or 12 months if the purchased property is being constructed.

Line of credit home loan

A line of credit can be opened up by borrowers who’ve owned their property for enough time to have grown the amount of equity in their home. This allows you to access a pre-determined amount of funds by drawing from this equity in a similar manner to a credit card. This can work for people who are looking to borrow money as they need it, although interest rates can be quite high and fees will be charged even if you don’t draw from the account in a given pay cycle. You’ll also have to consider whether you wish to reduce your home’s equity and if it’s entirely necessary for you to do so.

Reverse mortgage

This type of home loan is tailored to borrowers who are less flush with funds but have greater wealth lying in their assets. Funds are accessed via the borrower’s home equity, which tends to be more considerable in the typical reverse mortgage age demographic. These funds drawn from the borrower’s home equity to serve as a method of income for the borrower, repaying them rather than the lender (hence the term reverse mortgage). These funds can be used for anything, from home improvements to contributions to their monthly expenses.

Most reverse mortgage borrowers are over the age of 60, an age which is usually considered to be too risky for standard home loans given the shorter period of time spent earning an income before retirement. You can usually borrow between 15% and 25% of your property’s value depending on your age – the older you get, the more you can borrow. However, these loans are considered risky in the long term, as interest rates and fees tend to be higher and reverse mortgages can affect pension eligibility.

Top tips on how to compare different home loan types

Know where to look

The places you begin to look for your home loans will likely shape how successful your search will be. Savvy is always a great place to start out when comparing home loans, as our comparison tools contrast the top loans in the areas that are most important to you. If you don’t want to leave the research in your own hands, you may look to a mortgage broker to handle the hard work for you.

Seek out good interest and comparison rates

One of the most important areas to look out for, as the monetary disparity between a good and bad rate can be worth thousands upon thousands of dollars. While most people look at interest rates as the important number, comparison rates (interest rate plus fees) are actually a more accurate depiction of the amount you’ll be charged on top of your repayments. You should also look for lenders who are willing to negotiate, or waive completely, application and monthly fees, as doing so can save you a significant amount in the long run.

Try to grab as many beneficial bonus features as you can

Added features can change your repayment experience for the better, so you should try to ensure you have access to them on your home loan. Features such as free additional repayments and offset accounts allow you to chip away at your home loan more quickly (offset accounts allow you to do so without paying interest) and generally add flexibility.

Look for lenders who offer manageable monthly repayments

This will be the most important aspect of your home loan to determine, as you’ll have to manage monthly repayments constantly over however long you’re paying your loan. It’s advisable to review your finances in advance and determine how much you can afford, or are willing, to pay on a monthly basis before beginning your search.

The pros and cons of different types of mortgage lenders

Banks

PROS

Wide range of services

As the largest financial institutions, banks are often able to offer a broad selection of home loans in a variety of areas

Easily accessible

Banks, particularly the Big Four (ANZ, CommBank, NAB and Westpac) are the most accessible when it comes to physical locations

CONS

Less flexibility

In certain contexts, you may find that banks are less willing to negotiate or work around particular aspects of your home loan if you’re looking to amend it

Less personal service

Because of their size, banks generally aren’t as effective at giving you a personalised service compared to other lenders

Non-bank and online lenders

PROS

Speedier service

As there’s a lower caseload with these types of lenders, they’re generally able to process your application more quickly than other lenders

Competitive rates

These lenders also tend to offer amongst the lowest rates and fees on the market

CONS

More limited services

While they can offer specialised services and loans, each lender will usually have fewer overall loan services for you to use

Credit unions

PROS

Member-owned

Because credit unions don’t pay their shareholders dividends, profits are injected back in to facilitate rate drops and other good deals

Community-minded

Credit unions will often involve themselves in local projects and focus on building relationships between their members

CONS

More difficult to access

Some smaller credit unions are more limited when it comes to arranging face-to-face banking appointments

Frequently asked questions about different types of home loans

Is there a type of home loan that back-loads payments if I can’t afford large repayments straight away?

Yes – honeymoon rates are a common feature in home loans which offer a basement-level rate for the first 12 months before reverting back to regular market rates thereafter. Interest only home loans are a feature also available to borrowers that pre-determine a period of time (typically 1-5 years) to only make payments towards your interest, rather than both principal and interest. While this reduces initial repayments, it will likely result in you paying more in interest over the whole loan.

Which type of home loan is the best for a first homebuyer?

The answer to that depends on your own financial circumstances and preferences for what you’d want out of a home loan. You might also be eligible to receive a First Home Buyer Grant in your state, which can give first homebuyers a helping hand to the tune of upwards of $10,000. You can find out more information about first homebuyer home loans here.

Which type of home loan is best if I’m on low income?

Several of the home loans we’ve listed above can suit you if you’re on low income. Standard home loans can be approved for low-income earners, although they’re more likely to be smaller amounts, potentially over longer periods, with a higher interest rate and larger deposit required. If your low income is linked to an unsteady financial history, you might want to look at a non-conforming home loan.

What home loan is the best for buying investment property?

Investment property buyers often look to an interest-only feature of a standard personal loan to free up funds earlier on in the process to help balance their finances and potentially claim higher tax deductions. Otherwise, many investors utilise home equity to purchase investment property. Everyone is different, though, so it’s worth doing your research on your options for investment property. You can read more about it here.

Can I refinance my home loan if I see different types of mortgages with better conditions?

Yes – you’re best placed to refinance with variable rate home loans, so they’re useful if you’re wanting to keep your options more open. If you’re in a fixed or split rate home loan, refinancing will be more difficult and costly.

Will the type of home loan I apply for affect how much I’ll have to pay for my deposit?

Yes – low doc and non-conforming loans will typically have a higher minimum deposit requirement when compared to more standard home loans. However, your finances will also play a significant role in the size of the deposit you’ll have to pay, as lenders may not be willing to grant larger sums of money if your history looks a bit dicey.