Home loan types in Australia

Did you know there are many different types of home loans out there. But the main differences are:

1. Loan purpose
2. Rate type
3. Repayment type

But there are also some more unique types. Let's explore them all…

Loan purpose: investor vs owner-occupier

This is fairly simple: If you're buying a home to live in, you need an owner-occupier loan. If you're purchasing a property as an investment, then you need an investment loan.

Loans for investors and owner-occupiers often have all the same features and can be either fixed or variable, with interest-only or principal-and-interest repayments. The main difference is investor loans usually have higher interest rates, but you save money on certain tax benefits.

You might start off with an owner-occupier loan and then decide you want to rent out your property down the line. And that's ok! You can switch your home loan to suit.

Rate type: fixed vs variable

Mortgages with variable interest rates are the most common type of mortgage in Australia, especially for owner-occupiers. The rate can change at any time, but it's easier to exit a variable rate loan and refinance to a new mortgage.

Unlike variable loans, loans with fixed interest rates won't change for a set period of time (the fixed period). This means your repayments stay the same. After this period, the loan reverts to a variable rate. Exiting a fixed rate loan comes with breaking costs.

Learn more about fixed versus variable loans

Repayment type: principal-and-interest vs interest-only

Most home loans have principal-and-interest repayments. With these loans, you borrow money (the principal) and repay it with interest charged on top.

The alternative is interest-only repayments. Here, you delay repaying the loan principal for the first few years of the loan and only pay the interest charged. This means your repayments are much cheaper at the start. But they jump up sharply later because you have to repay the loan eventually.

Interest-only loans are used mostly by investors, but owner-occupiers may want to switch to interest-only repayments in some situations.

Our expert says

"There are many different types of home loans out there, but try not to get bogged down! The likelihood for most Australians is that they need an owner-occupier home loan repaying principal and interest. You can then make a decision about whether you want a fixed or variable interest rate depending on the flexibility and security you're after.

"If your circumstances are a little different and you think you do need a different home loan, choosing an investment loan or a construction loan or any other type of loan isn't necessarily harder to apply for. If you're not sure what kind of loan you need, it might be worth speaking to a mortgage broker. They know the loan landscape extensively and will not only be able to help find you the right loan type, but make sure you're in the best position to apply."

Rebecca Pike

Senior writer

Other home loan types

Construction loans

When you're borrowing money to build a home, you'll need a construction loan. These loans require repayments at different stages as construction progresses.

Line of credit loans

If you already own a property and have paid off some or all of the mortgage, you have something called home equity. You can use a line of credit loan to borrow against this equity.

This can be a good way to fund a purchase such as a renovation or a holiday.

Bad credit mortgages

It's hard to get an ordinary mortgage if you've had credit trouble in the past. Bad credit loans allow you to secure finance even if you have some negative marks on your credit history.

Lenders who deal in these loans typically take a more hands-on approach to assessing your credit file and take into account the circumstances that led to your poor credit history. However, be aware that these loans often carry higher interest rates.

Low doc home loans

A home loan application requires evidence of your employment and regular income. This is easy if you're a full-time salaried employee (in other words, a PAYG borrower). It's harder if you're self-employed. Low-doc loans exist to help these borrowers.

You can apply for a low doc loan with a letter from your accountant, Business Activity Statements (BAS), income declaration forms or other types of documentation to show your earnings. Interest rates are often higher with these loans.

Non-conforming loans

The term non-conforming loan covers a range of borrowers, including those with bad credit histories, borrowers who are retired or have no credit history.

SMSF loans

Self-managed superannuation funds (SMSFs) allow investors to take control of their retirement savings and invest them in property.

Many lenders offer home loans for SMSF property investment. These loans are structured like normal home loans, though the structuring of the actual SMSF for property investment can be fairly complicated.

Reverse Mortgages

Older borrowers (60 and above) looking to fund retirement costs without selling their home can take out a reverse mortgage. You borrow against the value of your property and when you sell the property (or when your heirs sell after your death), the lender gets repaid.

Bridging loans

What do you do when you've bought a new house, but you haven't sold your old one yet? Or what if you've sold but the settlement dates don't line up, meaning you don't have money to cover the purchase?

A bridging loan will help you cover this shortfall. You pay interest with an interest-only rate and then pay the loan off when your sale is finalised.

Tracker mortgages

A tracker loan is a type of variable rate home loan that follows the official cash rate set by the RBA. The loan's interest rate is set, usually at a certain level above the cash rate, and then follows the movement of the cash rate up or down each month.

Say for example your lender sets the tracker loan's rate at 2.00% above the cash rate. If the cash rate is 1.50% then your loan's rate is 3.50%. If the cash rate falls to 1.25%, your loan's rate falls to 3.25%.

Tracker mortgages are very rare in the Australian market. However, there have been recommendations for banks to offer tracker mortgages under banking reforms.

Still confused which home loan type suits your requirements? You can also get guidance from an expert mortgage broker.

Finder survey: What is the biggest hurdle for people getting a home loan?

Frequently asked questions about different loan types

• What is the most common type of loan?

  Most home loan borrowers in Australia will need an owner-occupier home loan with principal and interest repayments. Beyond that, investor home loans would be the best option for anyone buying an investment property.

• Is a variable rate home loan or a fixed rate home loan better?

  Whether a variable rate or fixed rate home loan is better depends on you as a borrower as well as the economic situation.

  The interest rate on fixed rate home loans won't change for the fixed rate period (between 1 and 5 years). If you want the stability of knowing exactly what your rate is, and therefore how much your repayments are, for that time then a fixed rate might be for you. Bear in mind that when the cash rate goes down you won't benefit from lower rates. There are also normally limits on how much you can make in extra repayments towards a fixed rate loan and additional break costs if you repay early.

  With a variable rate home loan the interest rate can change at any time. This is great news when the rate stays as it is or when it goes down, but not so great when rates go up. Rates rose 13 times over 2022 and 2023, and borrowers on a variable rate had to cop those rate rises. If you will want to make extra repayments and pay off your home loan early, a variable rate loan will likely have more flexibility for you to do that.

• What type of home loan is the cheapest?

  Owner-occupier home loans with principal and interest repayments tend to be the cheapest home loans on the market. Investor home loans are slightly higher than owner-occupier home loans. Interest-only home loans are a little more expensive still.

  When it comes to other types of home loans like construction and low-doc home loans, these rates tend to be more expensive.

  Although owner-occupier home loans will be the lowest interest rate, that doesn't necessarily mean it's the right one for you. There are always other factors to consider.

Written by

Richard Whitten

Editor

Richard Whitten is a money editor at Finder, and has been covering home loans, property and personal finance for 6+ years. He has written for Yahoo Finance, Money Magazine and Homely; and has appeared on various radio shows nationwide. He holds a Certificate IV in mortgage broking and finance (RG 206), a Tier 1 Generic Knowledge certification and a Tier 2 General Advice Deposit Products (RG 146) certification. See full bio

Richard's expertise

Richard has written 562 Finder guides across topics including:

• Home loans
• Property
• Personal finance
• Money-saving tips