Common Types of Home Loans in Australia Explained

Choosing between the common types of home loans in Australia is not only about finding an interest rate. The structure of the loan can affect your repayments, flexibility, interest costs, borrowing options and how well the loan fits your plans.

This guide explains the main home loan categories borrowers commonly encounter when buying, building, investing or refinancing. It is general information only and does not take your personal objectives, financial situation or needs into account. Lender eligibility, rates, fees, features and approval criteria vary between providers and depend on individual circumstances.

If you are still exploring the broader market, you can start with Home Loans Australia for an overview of home loan options and related resources.

Home loan types at a glance

Most home loans combine several features. For example, a borrower might have an owner-occupier principal and interest loan with a variable rate, or an investment loan with an interest-only period and a fixed rate. Understanding each layer helps you compare loans more clearly.

Owner-occupier home loans versus investment home loans

One of the first distinctions is whether the property is for you to live in or for investment purposes.

Owner-occupier home loans

An owner-occupier loan is generally used when you intend to live in the property as your home. These loans may offer different rates, features or lending criteria compared with investment loans, depending on the lender and product.

Owner-occupier borrowers often focus on:

• repayment affordability over the long term;
• features such as offset accounts, redraw facilities or extra repayment options;
• whether to choose fixed, variable or split interest rates;
• loan term and total interest payable over time; and
• upfront costs such as stamp duty, conveyancing and lender fees.

Investment home loans

An investment home loan is generally used to buy or refinance a property that is expected to generate rental income or form part of an investment strategy. Lenders may assess investment loans differently from owner-occupier loans because rental income, vacancies, expenses and tax considerations can affect the borrower's financial position.

Investment borrowers often compare:

• interest-only versus principal and interest repayments;
• fixed versus variable rate options;
• cash flow, rental income and holding costs;
• loan features that support investment management; and
• the tax and legal implications of the investment structure.

Tax treatment can be complex, so investors may wish to seek advice from a registered tax professional before choosing a loan structure.

Principal and interest versus interest-only home loans

Another key difference is how your repayments are structured.

Principal and interest home loans

With a principal and interest home loan, each scheduled repayment is designed to cover interest and gradually reduce the amount borrowed. Over time, if repayments are made as required, the loan balance reduces.

Potential advantages include:

• the loan balance is being paid down over the term;
• total interest paid over the life of the loan may be lower than comparable interest-only arrangements, depending on the rate, term and repayments;
• it can help build equity in the property; and
• it is a common structure for owner-occupier borrowers.

Potential limitations include higher scheduled repayments than an interest-only structure during the same period, because you are paying principal as well as interest.

Interest-only home loans

With an interest-only home loan, repayments during the interest-only period generally cover only the interest charged, not the loan principal. At the end of the interest-only period, the loan usually reverts to principal and interest repayments unless another arrangement is approved.

Borrowers may consider interest-only repayments for cash flow reasons, investment planning or short-term flexibility. However, there are important trade-offs:

• the loan balance does not reduce during the interest-only period unless extra principal payments are made;
• repayments can increase when the interest-only period ends;
• interest-only rates and criteria may differ from principal and interest loans; and
• the total interest paid over the full loan term may be higher, depending on the structure.

Interest-only loans are not suitable for every borrower. Lenders will assess eligibility and serviceability, and borrowers should consider whether they can manage repayments once the interest-only period finishes.

Fixed vs variable home loan rates

The choice between a fixed, variable or split rate affects how your interest rate behaves and how much flexibility you may have.

Variable rate home loans

A variable rate home loan has an interest rate that can change over time. Lenders may increase or decrease variable rates in response to funding costs, market conditions, Reserve Bank of Australia cash rate movements and their own pricing decisions.

Variable loans may appeal to borrowers who value flexibility. Depending on the product, they may include features such as:

• extra repayments without the same restrictions often found on fixed loans;
• redraw facilities;
• offset accounts;
• the ability to refinance or restructure without fixed-rate break costs; and
• rate decreases if the lender reduces the variable rate.

The main risk is uncertainty. If rates rise, repayments may increase. Borrowers should test whether their budget could handle higher repayments, not just the repayment at the starting rate.

Fixed rate home loans

A fixed rate home loan locks in the interest rate for a set period. During that fixed period, scheduled repayments are generally more predictable, which can help with budgeting.

Fixed loans may suit borrowers who want more certainty for a defined period. However, they can involve trade-offs such as:

• limits on extra repayments;
• reduced access to offset or redraw features, depending on the product;
• potential break costs if you repay, refinance or change the loan during the fixed period; and
• not benefiting from rate decreases on the fixed portion while the fixed term applies.

When the fixed period ends, the loan typically reverts to a variable rate unless you choose another arrangement with the lender.

Split home loans

A split home loan divides your borrowing into fixed and variable portions. For example, part of the balance may be fixed for repayment certainty, while the rest remains variable for flexibility and features.

A split home loan can be useful for borrowers who do not want to commit entirely to one rate type. The balance between the fixed and variable portions can affect repayments, feature access and exposure to rate changes.

To understand how different structures may affect repayments, you can use the site's home loan calculators as a starting point. Calculator results are estimates only and depend on the assumptions entered.

Packaged home loans and basic home loans

Some lenders offer home loan packages, while others offer simpler basic loans. The better option depends on how you use the features and how the fees, rates and conditions compare.

Packaged home loans

A packaged home loan may bundle a mortgage with features or related products, such as an offset account, credit card, transaction account or discounted insurance through associated providers. Packages often involve an annual package fee.

Potential benefits may include access to multiple features or interest rate discounts. Potential drawbacks include paying for features you do not use, complexity across linked products and fees that may reduce the value of any discount.

Basic home loans

A basic home loan is usually a simpler product with fewer features. It may suit borrowers who want a straightforward loan and do not need extensive account features. However, fewer features may mean less flexibility, so it is important to compare the total cost and conditions, not only the headline interest rate.

Construction loans

A construction loan is designed for building a new home or undertaking substantial construction. Instead of receiving the full loan amount at settlement, funds are usually released progressively as construction milestones are reached. These staged payments are often called progress payments.

Construction loans can differ from standard home loans because lenders may assess building contracts, council approvals, valuations, builder details and project stages. Borrowers should also plan for contingencies such as variations, delays and cost increases.

Common points to check include:

• when repayments begin and whether they are interest-only during construction;
• how progress payments are approved and released;
• what happens if construction costs change;
• whether the loan converts to a standard home loan after completion; and
• insurance and contractual requirements during the build.

Guarantor home loans

A guarantor home loan involves another person, often a close family member, providing additional security or a guarantee to support the borrower's application. This may help some eligible borrowers with a smaller deposit, but it creates serious obligations for the guarantor.

For borrowers, a guarantor structure may reduce the need for a larger deposit or lenders mortgage insurance in some circumstances, depending on the lender and structure. However, this is not automatic and must be assessed by the lender.

For guarantors, the risk is significant. If the borrower cannot meet repayments, the guarantor may be responsible for part or all of the guaranteed amount. Independent legal and financial advice is commonly recommended before entering this type of arrangement.

Low-deposit home loans

A low-deposit home loan allows a borrower to apply with a smaller deposit compared with the property value. The deposit required, maximum loan-to-value ratio and other conditions vary between lenders and products.

Low-deposit loans can help some buyers enter the property market sooner, but they may involve additional considerations:

• lenders mortgage insurance may apply where the deposit is below the lender's threshold;
• interest rates, fees or eligibility criteria may differ;
• a smaller deposit leaves less equity buffer if property values change;
• borrowing more can increase repayments and total interest; and
• government schemes may be available for some eligible borrowers, but rules vary and can change.

For more detail on lenders mortgage insurance, see Understanding Mortgage Insurance: A Guide for Australian Homebuyers.

Loan features that can change how a home loan works

Beyond the main loan type, features can make a significant difference to flexibility and cost. Common features include offset accounts, redraw facilities, extra repayment options and portability.

Offset accounts

An offset account is a transaction account linked to a home loan. Money held in the offset account can reduce the loan balance used to calculate interest. For example, if your loan balance is partly offset by savings in the linked account, interest may be charged on a lower net amount, depending on the product's offset rules.

Offset accounts can be valuable, but they may come with fees or be available only on certain loan types. You can read more in Unlocking the Hidden Value of Your Mortgage Offset Account.

Redraw facilities

A redraw facility may allow you to access extra repayments you have made above the required minimum. Conditions can vary. Some loans restrict redraw amounts, frequency or access, and some fixed loans may not offer the same redraw flexibility as variable loans.

Extra repayments

Making extra repayments can reduce the loan balance faster and may reduce interest over time. However, fixed loans may limit extra repayments or charge costs if limits are exceeded. Always check the product terms before relying on this feature.

How to compare different types of home loans in Australia

When comparing loan structures, it helps to work through the practical questions rather than choosing based on a single feature.

• What is the property purpose? Owner-occupier and investment loans may have different pricing and criteria.
• Do you want to pay down the debt immediately? Principal and interest repayments reduce the balance, while interest-only repayments do not unless extra payments are made.
• How much repayment certainty do you need? Fixed rates can provide certainty for a period, while variable rates can move.
• How important is flexibility? Offset, redraw and extra repayments can be useful, but availability varies.
• Could your circumstances change? Consider job changes, family plans, investment goals, relocation and refinancing options.
• What is the total cost? Compare interest, comparison rates, fees, package costs, break costs and feature value.
• What are the risks? Think about rate rises, repayment increases after interest-only periods, construction delays or guarantor obligations.

Borrowers who want help understanding how different structures may apply to their circumstances can speak with a participating mortgage broker through the Brokers page. Any loan recommendation or approval will depend on lender criteria and your individual financial situation.

Final thoughts

The main types of home loans in Australia are best understood as building blocks. A single loan may combine property purpose, repayment type, rate type, features and special structures such as construction, guarantor or low-deposit arrangements.

Before applying or refinancing, compare how each structure affects repayments, flexibility, risk and long-term cost. The right questions can help you avoid choosing a loan that looks appealing at first but does not suit how you actually plan to use it.

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