Choosing a home can be exciting. Choosing the home loan attached to it. Variable, fixed, split and interest-only home loans each work differently. Then there are offset accounts, redraw facilities, construction loans, guarantor loans and bridging finance to consider. It is easy to focus on finding the lowest home loan rate and overlook the type of mortgage that could better suit your life.
So, which home loan is best for you? The honest answer depends on your income, budget, savings, plans and comfort with changing interest rates. Let’s compare the main types of home loans in Australia without the banking jargon.
What Types of Home Loans Are Available in Australia?
The main types of home loans are variable rate, fixed rate, split and interest-only loans. However, these options do not all describe the same part of a mortgage. Variable, fixed and split refer to how your home loan interest rate is structured.
Principal and interest and interest-only refer to how you repay the loan. You may also choose a house loan designed for a particular purpose, such as buying your first home, investing, building, refinancing or buying before selling another property.
a.What Is a Variable Rate Home Loan?
A variable rate home loan has an interest rate that can rise or fall during the life of the mortgage. Your lender may change the rate due to funding costs, market competition, the Reserve Bank cash rate or other commercial factors.
If your variable home loan rate falls, your required repayments may decrease. If it rises, your repayments may increase.
Variable home loans often provide useful features such as an offset account, redraw facility, flexible repayments and the ability to make additional payments. Features differ between lenders and products, so they should never be assumed.
In my view, flexibility is the biggest appeal. You can often pay extra when money is flowing, then access eligible additional repayments through redraw if an unexpected expense arrives. That can feel far less restrictive than being locked into a fixed contract. The trade-off is uncertainty. A variable mortgage can be comfortable when rates fall and frustrating when several increases land in quick succession.
Who Is a Variable Home Loan Best For?
A variable home loan may suit borrowers who want flexibility, plan to make extra repayments or keep savings in an offset account. It may also appeal to people who can manage an increase in repayments if rates rise. Could be a suitable option if your income is stable and your budget contains a reasonable safety margin. It may be less comfortable if even a small repayment increase would place pressure on your household finances.
What Are the Risks of a Variable Rate Mortgage?
The main risk is that your interest rate and repayments can increase. A rate cut is possible, but it is never guaranteed. Lenders also decide whether and how much of a cash rate movement they pass on. Before selecting a variable mortgage, test your budget at a higher rate. A home loan calculator can show what your repayments could become if the rate increased by 0.50%, 1% or 2%.
b.Are Fixed Rate Home Loans Better Than Variable Home Loans?
A fixed rate home loan locks in an interest rate for an agreed period, commonly between one and five years. During that fixed term, your scheduled repayments generally stay the same. This can make budgeting easier. If market rates rise during your fixed period, your fixed rate and repayments remain protected from that increase. There is another side to that comfort. If variable rates fall, you will not receive the benefit on the fixed portion of your mortgage. Fixed home loans can also limit additional repayments, offset access and redraw. Ending or changing a fixed loan early may result in break costs. At the end of the fixed term, the loan will usually move to a variable rate unless you arrange another option. This is sometimes called the revert rate, and it may be higher than the rate you were paying. ASIC’s Moneysmart guide to choosing a home loan explains the benefits and limitations of fixed and variable interest rates.
When Is a Fixed Rate Home Loan a Good Idea?
A fixed rate home loan may suit a borrower who values predictable repayments. It can be helpful for first home buyers, families working with a firm budget or anyone who would lose sleep over every interest rate announcement. Fixing a mortgage should not be treated as a bet that you can outsmart the market. Even economists cannot predict every rate movement. The better question is whether certainty has genuine value in your household budget. If knowing your exact repayment allows you to plan confidently, that certainty may be valuable even if variable rates later fall.
Can I Make Extra Repayments on a Fixed Home Loan?
Some fixed home loans allow limited additional repayments, but the rules vary. A lender may set an annual or fixed-term cap. Going beyond that cap, refinancing or selling the property during the fixed period could trigger break costs. Before fixing, ask what happens if you sell, refinance, receive a bonus or want to repay a large lump sum. Your future self may be very grateful that you checked.
c.Is a Split Home Loan the Best of Both Worlds?
A split home loan divides your mortgage into separate portions. One portion has a fixed interest rate, while the other has a variable interest rate. For example, you might fix 60% of the home loan and keep 40% variable. The fixed portion offers greater repayment certainty. The variable portion may allow access to features such as an offset account, redraw and additional repayments.
This structure reduces the pressure of making an all-or-nothing decision. You receive some protection if variable rates rise while retaining some benefit if they fall. However, a split loan is not automatically the perfect compromise. It can involve multiple loan accounts, different repayment dates and separate product conditions. Break costs may still apply to the fixed portion.
How Does a Split Home Loan Work?
Your lender creates two loan accounts secured by the same property. Each portion follows its own interest rate, repayment and feature rules. The variable portion can often be linked to an offset account, although lender conditions vary. The fixed portion normally provides stable repayments for the chosen fixed period. There is no universal best split. A 50/50 structure may look neat, but your ideal balance should reflect your budget, savings and tolerance for rate changes.
Who Should Choose a Split Mortgage?
A split mortgage may suit borrowers who want more certainty without giving up all the flexibility of a variable loan. It can also help someone who feels uncomfortable committing the entire home loan to either option. A larger fixed portion may suit a borrower who prioritises predictable repayments. A larger variable portion may suit someone who has strong cash flow, plans to pay extra or keeps substantial savings in an offset account.
d.How Does an Interest-Only Home Loan Work?
An interest-only home loan allows you to pay only the interest charges for an agreed period, often up to five years. You are not normally reducing the amount borrowed during that period. This produces lower initial repayments than principal and interest repayments on the same loan amount. That short-term relief can look attractive, particularly to property investors focused on cash flow.
The sting arrives later. Once the interest-only period ends, you must usually repay the principal over the remaining loan term. Your repayments can rise sharply because you have less time to repay the original debt. You may also pay a higher interest rate and more total interest over the life of the mortgage. ASIC provides an interest-only mortgage calculator that can help you compare repayments during and after the interest-only period.
Is an Interest-Only Home Loan Best for Property Investors?
Interest-only home loans are commonly associated with investment properties because they may support short-term cash flow. However, they are not automatically the best mortgage for every investor. The right choice depends on the investment strategy, expected rent, expenses, tax position and ability to manage higher future repayments. Potential tax benefits should be discussed with a qualified tax adviser. Owner-occupiers may also receive interest-only approval in limited circumstances, but they should understand that the principal does not reduce during the interest-only period.
What Happens When an Interest-Only Period Ends?
The loan usually converts to principal and interest repayments. Because the original loan balance must now be repaid over a shorter remaining term, repayments can increase substantially. Do not wait until the final month to consider the change. Calculate the future repayment before taking the loan and review your position well before the interest-only period expires.
Principal and Interest Versus Interest-Only Repayments
Principal and interest repayments cover both the amount borrowed and the interest charged by the lender. Your loan balance gradually falls, provided repayments are made as required. Interest-only repayments cover the interest charge for a limited period. The principal usually remains unchanged unless you make additional repayments that the loan permits.
Principal and interest is generally the more direct path to owning your home sooner. Interest-only can ease short-term cash flow, but that relief comes with delayed debt reduction and potentially higher long-term costs. If your goal is to repay your house loan and build equity, principal and interest will often make more sense. If you are considering interest-only for a specific investment or cash-flow strategy, compare the full cost rather than judging the loan by its first-year repayment.
e. Is an Offset Home Loan Worth It?
An offset account is a transaction account linked to an eligible home loan. The money held in the account reduces the loan balance used to calculate interest. If your mortgage balance is $500,000 and you keep $30,000 in a 100% offset account, interest is generally calculated on $470,000 while that money remains in the account. An offset can help you pay less interest while keeping your cash accessible. Your salary and savings can sit in the account, reducing daily interest without being paid directly into the mortgage.
It is not a separate interest rate type. Offset accounts are generally attached to eligible variable home loans, although some lenders may offer partial or limited offset features with certain fixed products. An offset loan can have a higher rate, annual package fee or account fee. It delivers the greatest benefit when you maintain enough money in the account to outweigh those extra costs. Moneysmart provides a clear explanation of how mortgage offset accounts work.
f. Is an Offset Account Better Than Redraw?
An offset account holds your own money in a separate transaction account. Redraw provides access to eligible extra repayments previously made directly into the home loan. Both can reduce interest, but access rules, fees and tax treatment can differ. This is especially important if a property may later become an investment. Seek tax advice for your circumstances rather than assuming the two features are identical.
What Other Types of Home Loans Are Available?
Variable, fixed, split and interest-only options cover the main rate and repayment choices. However, several specialised home loans are designed for different property plans.
g. What Is a Guarantor Home Loan?
A guarantor home loan allows an eligible person, often a parent or close family member, to use part of their property equity as additional security for the borrower’s mortgage. This can help an eligible borrower purchase sooner or reduce the need for lenders mortgage insurance. It also creates a serious legal and financial obligation for the guarantor. If the borrower cannot meet the repayments, the guarantor’s finances and property may be at risk. Guarantors should obtain independent legal and financial advice before signing any guarantee.
h. How Does a Bridging Loan Work?
A bridging loan is short-term finance that may help you buy a new property before selling your existing home. The lender considers your current debt, the new purchase, available equity and expected sale proceeds. Depending on the structure, you may need to service significant debt until the existing property sells. A bridging mortgage can reduce the pressure to sell first, but it can become expensive if the sale takes longer or achieves a lower price than expected. A realistic sale price and backup plan are essential.
i. What Is a Construction Home Loan?
A construction home loan releases funds in stages as the building work progresses. These progress payments may align with milestones such as the slab, frame, lock-up, fixing and completion stages. During construction, interest is generally charged only on the amount already drawn. Repayments are often interest-only on the drawn balance during this period. After completion, the loan typically converts to standard principal and interest repayments. Construction loans can suit new builds and major renovations, but they involve additional documents, valuations and lender approval at different stages.
j. What Is an Owner-Occupier Home Loan?
An owner-occupier home loan is for a property you intend to use as your main residence. Owner-occupier rates can be lower than investor home loan rates, depending on the lender and product. You must describe the property’s intended use accurately. If your circumstances change and you later rent out the home, tell your lender and seek advice about any financial or tax implications.
k. What Is an Investment Home Loan?
An investment home loan is used to purchase a residential property that will be rented out or held as an investment. Investment mortgages may have different rates, lending criteria, deposit requirements and repayment choices. Some investors choose principal and interest to reduce debt, while others consider interest-only to manage short-term cash flow. Neither approach is universally best. The right structure depends on the investor’s goals, risk level and tax advice.
Which Type of Home Loan Is Best for Me?
The best home loan is not necessarily the one with the lowest advertised interest rate. It is the loan that combines a competitive total cost with features and repayment conditions that support your financial plans. A variable rate home loan may suit you if flexibility, extra repayments and offset access are priorities.
A fixed rate home loan may suit you if stable repayments and easier budgeting matter more than flexibility. A split home loan may suit you if you want a blend of certainty and flexibility. An interest-only mortgage may suit a specific short-term strategy, particularly for some investors, but you must prepare for higher future repayments and greater total interest.
A guarantor loan may help an eligible buyer enter the market sooner. A construction loan may support a new build, while bridging finance may help an existing owner buy before selling. The best choice should still be affordable if life becomes less cooperative. Test your budget against higher rates, lower income and unexpected expenses before committing.
How Do I Compare Home Loans from Australian Lenders?
Start with the interest rate and comparison rate, then examine fees, features, repayment rules and eligibility requirements. The comparison rate includes the interest rate and certain fees based on a standard loan example, but it may not reflect your exact loan amount or every cost. Compare products from a broad range of banks and lenders. Searches for Commonwealth Bank home loans, Westpac home loans, NAB home loans, ANZ home loans, Macquarie home loans, ING home loans, Ubank home loans and Reduce Home Loans can provide a useful starting point.
Brand recognition should not decide your mortgage. A major bank may offer convenience and a large branch network, while an online lender or non-bank lender may offer sharper pricing or different lending policies. Check whether the loan provides a full offset account or partial offset, whether redraw fees apply, how much extra you can repay on a fixed loan and what rate applies after an introductory or fixed period. Most importantly, compare products based on your circumstances. The best home loan rates advertised online may apply only to particular borrowers, deposit sizes, loan-to-value ratios, repayment methods or property types.
Frequently Asked Questions About Types of Home Loans
What are the four main types of home loans?
The four commonly compared home loan options are variable rate, fixed rate, split and interest-only. Variable, fixed and split describe the interest rate structure. Interest-only describes the repayment method.
Is a fixed or variable home loan better?
Neither is always better. A fixed home loan offers more repayment certainty, while a variable home loan generally provides greater flexibility and access to features such as offset and redraw. The better option depends on your budget, plans and tolerance for rate changes.
Can I have both a fixed and variable home loan?
Yes. This is known as a split home loan. Part of the mortgage has a fixed rate and the remaining portion has a variable rate.
Can I change from a variable to a fixed home loan?
You may be able to fix all or part of an eligible variable home loan. Before changing, check the available fixed rates, fees, additional repayment limits, feature changes and what happens when the fixed period ends.
Can I refinance a fixed rate home loan?
Yes, but refinancing before the end of a fixed term may result in break costs. Ask your existing lender for a payout figure and compare all switching costs before proceeding.
Does an offset account reduce my repayments?
An offset account reduces the loan balance used to calculate interest. Depending on the loan structure, this may reduce the interest charged and help more of your repayment go towards the principal. It does not always reduce the required scheduled repayment immediately.
Are interest-only home loans cheaper?
They have lower repayments during the interest-only period because you are not required to repay the principal. However, they can cost more over the full loan term and repayments may rise sharply when the interest-only period ends.
Which home loan is best for a first home buyer?
Many first home buyers consider variable loans for flexibility, fixed loans for repayment certainty or split loans for a balance of both. The best choice depends on income stability, deposit, savings, future plans and ability to absorb rate increases.
Compare Home Loan Rates Before You Decide
Choosing a home loan should leave you feeling informed, not trapped in a maze of rates and fine print. Before applying, compare the rate, comparison rate, fees, features and likely repayments across several lenders. Then test how each option performs if interest rates or your circumstances change.
Ready to find a mortgage that fits your life as well as your budget? Compare home loan rates with RateBuster or use RateBuster’s home loan calculators to estimate repayments, borrowing power and potential savings.
