Thinking about buying a home but unsure about the types of home loans available? With so many options, from split loans to variable-rate loans, how do you decide which one to get?

Understanding the different home loan types can help you reap the most advantages with the right budget–no matter if you're a first-time buyer or refinancing.

Ready to choose the right home loan type for your future? Let's explore the various types of home loans and find out which one is perfect for your situation!

 

Standard Types of Home Loans

Variable-rate Loans

With a variable-rate loan, the rate of interest can change according to the Reserve Bank of Australia's cash rate movements, meaning your repayments can vary over time. When the rate decreases, your repayment amount follows suit–and the same applies if it increases.

Of course, this can benefit you, as lower interest rates mean lower monthly payments.

These loans often come with features like offset accounts and redraw facilities, adding extra flexibility for managing your finances.

 

Fixed-rate Loans

The appeal of fixed-rate loans is their stability and predictability. It sets your interest rate for a specific period, usually one to five years, ensuring your repayments stay the same.

It brings you an advantage in the form of consistency for budgeting and managing household expenses.

However, fixed-rate loans typically have fewer features than variable loans–if interest rates drop, you might miss out on savings.

Additionally, breaking early a fixed-rate loan can lead to significant penalties, so consider your long-term plans carefully.

 

Split Loans

Split loans provide a balanced approach by combining a variable-rate loan with a fixed rate loan. How does it work?

Part of your mortgage has a fixed rate, offering stability and predictable repayments, while the other part has a variable rate, allowing you to benefit from possible interest rate decreases. This makes it a versatile type of loan.

For instance, you and your partner split your home loan: $300,000 fixed, $150,000 variable.

This mix allows you to manage your finances more effectively and protects you from significant rate hikes compared to going full with a $450,000 fixed rate.

 

Loan Purpose

First Home Buyer Loan

Living up to its name, first home buyer loans are designed to help new buyers with lower deposit requirements and competitive interest rates.

This is one of the best choices of home loans for professionals as first-time home buyers. For instance, if you're a nurse, you might benefit from special programs like home loans for nurses.

Nurse home loans offer advantages for nurses, such as a nurse LMI (Lenders Mortgage Insurance) being waived to 90% LVR and discounted rates.

You can also choose other types of home loans for professionals based on your profession, such as a home loan for pharmacists, a physiotherapist home loan, and more.

 

Investment Home Loan

This loan is specifically tailored to purchase property as an investment, not as a home for living. As a result, it often has different interest rates and features compared to standard home loans.

However, some lenders see this home loan type as risky because the borrower can be uncertain about paying their regular repayments. Plus, maintenance costs tend to be higher as nobody lives on the property.

Thus, they may give the borrower stricter conditions and higher interest rates.

 

Guarantor Home Loan

This is one of the best loan choices if you have family support but lack a large deposit.

In this setup, a family member, usually a parent, uses their property as security for part of the loan. This can help you avoid paying LMI and secure a loan with a smaller deposit.

Note that this loan comes with risks for the guarantor, whose property is at stake. Hence, you must make clear agreements on the payment aspect and understand your responsibilities to repay your loan before opting for this home loan.

 

Low-doc Home Loan

Low-doc home loans are available to self-employed people or those without regular income documentation, such as freelancers, small business owners, contractors, etc.

To qualify, you may need to provide alternative proof of income, such as business activity statements or accountant declarations, to prove you have a good credit history. Usually, lenders also require ABN proof, especially for business owners.

While they offer flexibility, low-doc loans usually come with higher interest rates than standard loan and require a larger deposit to mitigate the increased risk to lenders.

 

Non-Conforming Home Loan

Unlike low-doc loans, non-conforming home loans are designed for borrowers who don't meet the standard criteria for traditional loans, including those with poor credit history, irregular income, or unique financial circumstances.

These loans offer more flexible lending criteria but often come with higher interest rates and costs than normal home loans due to the increased risk for lenders.

 

Home Equity Loan and Line-of-Credit Home Loan

These loans let you borrow against the equity in your property.

A home equity loan offers a lump sum for major expenses such as property investment, renovations, or even debt consolidation. You can use your home equity to borrow money through options like a line of credit loan, accessing additional repayments via a redraw facility, or refinancing your mortgage.

On the other hand, a line-of-credit home loan offers a flexible borrowing limit that you can draw from as needed, similar to a credit card. However, please note that the interest rates tend to be higher than standard loans.

 

Conclusion

Selecting the right home loan is an important part of your homeownership journey. With choices ranging from variable-rate to fixed-rate and split loans, understanding the differences can greatly influence your future financial condition.

Matching your loan type with your financial goals and personal situation is important. When evaluating different types of home loans, consider key factors like interest rates, available features, and your long-term plans.