Which type of home loan is best?

There is no one-size-fits-all best home loan type. In fact, there are several home loan types available to suit a range of homeowners in Australia. 

When it comes time to compare and choose your mortgage, you’ll want to have familiarised yourself with all the different types of home loans. This way you can choose your best home loan type for your financial situation and needs. 

Here are some common types of home loans in Australia, along with factors to consider when choosing the right one for you.

Types of home loans in Australia

Owner occupier home loans

Owner-occupiers refer to borrowers that live in the property as their principal place of residence. Whether you own one or ten properties, the home that you live in will require an owner-occupier home loan. 

Owner-occupiers may be more likely to be offered lower interest rates compared to investors, as lenders typically see them as a lower risk customer. After all, you are more likely to try and meet your mortgage repayments when missing them means losing the roof over your head. 

Investor home loans

Investors refer to borrowers that rent out a property they own to earn an income from it. If you cannot purchase the property outright, the type of mortgage you will require is an investor home loan.

Investor loans are differ to owner-occupier loans as they may offer a range of benefits in some circumstances, including flexible payment options that may boost capital growth and rental yields, as well as offering tax advantages.

Variable rate home loan

This type of loan has an interest rate that may fluctuate with the Reserve Bank of Australia’s (RBA) official cash rate. If the cash rate were to change, your home loan interest rate typically moves in tandem. This can result in higher interest charges if the cash rate rises, or vice versa for a cut to the cash rate. 

Further, variable rate home loans may be more likely to come with helpful features, such as offset accounts or a redraw facility. 

Fixed rate home loan

With a fixed rate home loan, your interest rate is locked in for a set period, typically 1-5 years. This provides borrowers with greater stability in their budget as their repayments will not change over that time. You will know exactly how much to pay each week/fortnight/month. 

However, lenders typically reserve their home loan features for variable rate home loans. Also, if interest rates fall in the fixed period, you could be locked in at a higher rate than variable rate customers are paying.

Split rate home loan

If you cannot choose between variable or fixed interest rate home loans, you can choose to split your loan into fixed and variable portions. 

This may be a best of both worlds approach for some borrowers, as you may gain some of the benefits of both types. For example, you may hedge against potential interest rate fluctuations with your fixed rate loan portion, while gaining access to features through your variable rate portion. 

Interest-only home loan

With interest-only home loans, you may pay only the interest on your loan for a certain period (usually 1 to 5 years). Your principal owing will not be paid off right away, and it will not change in this time. 

This loan type may result in lower initial repayments, which can be beneficial for investors looking to keep expenses down, or first home buyers that need some breathing room in their budget. 

When the interest-only period ends, you’ll find that your principal and interest repayments are much higher than if you didn’t choose the interest-only option. This is because you are not reducing the principal amount. You are essentially just shortening the loan term. 

Principal and interest home loan

With this loan type, you will make regular repayments that cover both the interest and principal owing. This will gradually reduce your debt over time. Principal and interest home loans are the most common option offered to home buyers - particularly owner-occupiers. 

Line of credit home loan

A line of credit home loan allows you to access equity in your home up to a specified limit. It works similarly to a credit card, as you may borrow and repay money up to the set limit, based on the equity in your home, or a percentage of it.

This loan type is suited to borrowers that have been paying off their mortgage for some time and have built up equity to use. While it can be flexible, just like a credit card it can lead to financial stress if not managed carefully.

If you’re not sure where to start, consider speaking with a mortgage broker. They may offer you expert advice based on your specific financial situation, as well as help you find a loan that best suits needs and goals.

Compare home loans in Australia