A handy guide to different home loan types

A handy guide to different home loan types

Published Fri 3 May 2024 • 6 min read

Understanding the different types of home loans

If you’re looking for a guide to different types of home loans, you’ve come to the right place. Here’s what you need to know about common mortgage types, including why pre-approval can be the most important step in your home loan hunt.

Type of loan
What is it?
Who's it for?

Fixed rate

A fixed rate home loan is where the interest rate is locked in for an agreed amount of time – usually between 1-5 years.

A fixed rate loan is ideal for borrowers looking for certainty because you know what your repayments will be for the term of the fixed rate. So, you can budget confidently while being protected from interest rate rises.

Variable rate

A variable rate home loan is where your interest rate can change based on the wider economy.

A variable rate loan is for anyone looking for a flexible loan with more features than a fixed rate loan, including redraw and additional payments. A variable rate loan means your repayments may fluctuate as rates rise or fall.

Split

A split home loan is where a portion of your loan has a fixed interest rate and the remainder has a variable interest rate.

A split loan could be your answer if you’re looking for the best of both worlds. A split loan gives you the confidence to budget for a portion of your repayments while potentially benefitting from any rate drops with your variable portion.

Offset

An offset home loan has a transaction account linked to your loan.

An offset loan is worth a look if you're a thrifty saver. This option lets you deposit your savings and income into a transaction account attached to your home loan. An offset account can be a clever way of paying less interest, helping you save money and pay your loan down faster.

Interest only

An interest only home loan is where you pay only the interest for an agreed period rather principal and interest.

An interest only loan could be worth considering if you want to temporarily lower your repayments. However:

  • you aren’t making progress towards paying off the loan principal
  • once the interest-only period ends you’ll need to adjust to higher repayments
  • you may also end up paying more interest over the life of the loan

Guarantor

A guarantor home loan is when a third party – known as 'the guarantor' – offers some of their home equity to secure a home loan for a borrower.

A guarantor loan can help borrowers access a home loan faster than saving for a 20% deposit and avoid having to pay for lenders mortgage insurance.

However, if you’re unable to meet your loan repayments, the guarantor becomes responsible for them. Because of the potential financial implications, guarantors should seek legal advice before entering a guarantee.

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Bonus tip: pre-approval

When you’ve chosen your home loan options, a clever tip is organising home loan pre-approval with a lender.

Pre-approval is an indicative guide from a lender of how much you can afford to borrow. Knowing your borrowing limit gives you a target price range for your property search.

You’re also under no obligation to take that loan. However, it can show real estate agents and buyers you’re a serious purchaser and ready to make an offer on the property or to bid at auction. Pre-approval usually lasts up to 90 days.

However, just because you can borrow a certain amount doesn’t always mean you should – leaving yourself a little wriggle room in case of other costs can be smart.

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