Types of Home Loans in Australia

There are many different home loan types available in Australia which are typically defined by their payment type, interest rate, and purpose. The majority of lenders will offer home loans based on either their interest rate or their purpose. It’s important to explore what types of home loans are offered within Australia so you can be sure you’re making the right choice for your circumstances.

Fixed Rate Home Loan

A fixed rate home loan means that the interest rate for the home loan is set at a particular rate and will not change for a certain period of time. Fixed rate home loans usually remain set for about 1 to 5 years, depending on each individual agreement. Once the fixed rate period ends, your lender may offer a variety of options, including:

• Moving the home loan to a variable rate
• Refixing your home loan (i.e. negotiating another fixed rate term)
• Offering a split home loan solution
• Refinancing your current home loan

While a fixed rate home loan can offer repayment certainty, it typically will not include access to extra features like offset accounts, redraw facilities, or the ability to make extra repayments. Fixed rate home loans also offer less flexibility with lenders charging break cost fees when changing home loan products or refinancing within the fixed rate period.

Variable Rate Home Loan

A variable rate home loan means that the interest rate is not set and can fluctuate over the length of the loan. There are many factors that can influence interest rates such as:

• the official cash rate set by the Reserve Bank of Australia (RBA)
• inflation
• regulatory changes

This means that a borrower’s home loan repayments can fluctuate, making it more difficult to budget and set financial goals for the future. However, each lender will respond to these factors individually and will have their own unique policies in place.

Variable rate home loans often include extra features such as offset accounts, redraw facilities, and extra repayment facilities. Typically, it is also easier to refinance a variable rate home loan without break costs or fees.

Split Home Loan

A split home loan means borrowers are able to split the home loan into two portions. One portion has a fixed interest rate while the other portion is on a variable interest rate. This offers borrowers the opportunity to get the benefits of both fixed and variable interest rates and can give borrowers access to extra features via the variable portion of their loan. The ratio of the split is up to the borrower, but the most common split ratios are 50:50, 60:40, and 70:30.

Construction Loan

Also referred to as owner builder loans, construction loans are a specialised home loan for borrowers who are building or renovating their own home, rather than purchasing an existing home.

Unlike traditional home loans, which typically pay the loan amount in a lump sum on settlement, construction loans allow you to access home loan funds in instalments known as progressive drawdowns or progress payments. Using progressive payments helps manage cash flow throughout the construction process and ease the financial strain on borrowers. Interest is only charged to the funds you use as opposed to the entire loan amount.

Guarantor Home Loan

Guarantor home loans can offer a solution for borrowers who want to avoid Lenders Mortgage Insurance but are struggling to save for a home deposit. With guarantor loans, a third party (usually a parent or family member) uses their home equity to secure the home loan. The guarantor is not expected to make any repayments towards the home loan.But if the borrower defaults on their loan then the guarantor may be held responsible for repaying the loan in its entirety.

Low Doc Home Loan

Low doc home loans are low documentation loans for individuals who struggle to produce the required documentation needed when applying for a home loan.Not all lenders offer low doc home loans and they can have higher interest rates than a typical home loan option. Typically, a low doc loan is ideal for:

• individuals who are self-employed
• investors
• contractors or freelancers who may not have consistent tax returns or financial statements

Bridging Loan

A bridging loan is a short-term loan for individuals who want to purchase a new home but have yet to sell their existing home. The bridging loan covers the purchase price of the new home and can be repaid once you sell your existing home.

Typically, the loan term is 6 to 12 months and has an interest-only rate. An interest-only rate means you only pay the interest on the loan rather than repaying the loan amount.

Line of Credit Loans

Once you repay some or all of your home loan, you build up equity in your home and can then borrow against this equity. Typically, a line of credit loan is used to fund home renovation, though it can be used for other purposes as well. You can choose to receive the funds in a lump sum or in separate payments over a period of time.

It’s important to note that the amount borrowed through the line of credit will need to be repaid before the end of your home loan term (usually around 25 to 30 years).

Interest Only Home Loan

Unlike other home loans where you repay both the interest and the loan amount (also known as ‘the principal’), an interest-only loan means you only repay the interest. Interest-only loans are short-term, generally between 1 to 5 years. They usually revert to a standard ‘principal and interest loan’ when the set period ends. Typically, interest-only loans are used by property investors who do not intend to hold onto the property for an extended period of time.

We’re Here to Help

With such a wide variety of home loan options available, finding the right choice for you can be daunting and stressful. That’s why mortgage brokers at Oceania Finance are here to help. We use our extensive experience and friendly service to guide you through the home loan process and achieve your home ownership goals.

Get in touch today to begin your home loan journey.