Different loan types.
What’s easier to find?
A new home or
the right loan?
Finding a home is one thing. Finding the right loan is another. There are hundreds of loan options out there. Different types, lenders and new products launching all the time. We’ll help you make sense of it all and guide you to a loan that actually suits your needs.
DIFFERENT LOANS
Types of home loans and how they work.
Here’s a quick look at the main types of loans and some of their advantages and disadvantages.
Variable Rate Loans
Interest rates go up or down over the life of the loan depending on the official rate set by the Reserve Bank of Australia, funding costs and the individual decisions of each lender. Your regular repayments generally pay off both the interest and some of the principal.
Pros
- If interest rates fall, the size of your minimum repayments will too.
- Standard variable loans generally allow you to make extra repayments. Even small extra payments can cut the length and cost of your mortgage.
- Basic variable loans often don’t come with a redraw facility, removing the temptation to spend money you’ve already paid off your loan.
Cons
- If interest rates rise, the size of your repayments will too.
- Increased loan repayments due to rate rises could impact your household budget, so make sure you take potential interest rate hikes into account when working out how much money to borrow.
- You need to be disciplined around the redraw facility on a standard variable loan. If you dip into it too often, it will take much longer and cost more to pay off your loan.
- If you have a basic variable loan, you may not be able to pay it off quicker or get access to money you have already repaid if you ever need it.
Fixed Rate Loans
The interest rate is fixed for a certain period, usually the first one to five years of the loan.
This means your regular repayments stay the same regardless of changes in interest rates. At the end of the fixed period you can decide whether to fix the rate again, at whatever rate lenders are offering, or move to a variable loan.
Pros
- Your regular repayments are unaffected by increases in interest rates.
- You can generally repay the variable part of the loan quicker if you wish.
Cons
- If interest rates go down, you don’t benefit from the decrease. Your regular repayments stay the same.
- You can end up paying more than someone with a variable loan if rates remain higher under your agreed fixed rate for a prolonged period.
- There is very limited opportunity for additional repayments during the fixed rate period.
- There may be significant break costs that you must pay if you exit the loan before the end of the fixed rate period.
Variable Rate Loans
Interest rates go up or down over the life of the loan depending on the official rate set by the Reserve Bank of Australia, funding costs and the individual decisions of each lender. Your regular repayments generally pay off both the interest and some of the principal.
Pros
- If interest rates fall, the size of your minimum repayments will too.
- Standard variable loans generally allow you to make extra repayments. Even small extra payments can cut the length and cost of your mortgage.
- Basic variable loans often don’t come with a redraw facility, removing the temptation to spend money you’ve already paid off your loan.
Cons
- If interest rates rise, the size of your repayments will too.
- Increased loan repayments due to rate rises could impact your household budget, so make sure you take potential interest rate hikes into account when working out how much money to borrow.
- You need to be disciplined around the redraw facility on a standard variable loan. If you dip into it too often, it will take much longer and cost more to pay off your loan.
- If you have a basic variable loan, you may not be able to pay it off quicker or get access to money you have already repaid if you ever need it.
Fixed Rate Loans
The interest rate is fixed for a certain period, usually the first one to five years of the loan.
This means your regular repayments stay the same regardless of changes in interest rates. At the end of the fixed period you can decide whether to fix the rate again, at whatever rate lenders are offering, or move to a variable loan.
Pros
- Your regular repayments are unaffected by increases in interest rates.
- You can generally repay the variable part of the loan quicker if you wish.
Cons
- If interest rates go down, you don’t benefit from the decrease. Your regular repayments stay the same.
- You can end up paying more than someone with a variable loan if rates remain higher under your agreed fixed rate for a prolonged period.
- There is very limited opportunity for additional repayments during the fixed rate period.
- There may be significant break costs that you must pay if you exit the loan before the end of the fixed rate period.
Split Rate Loans
Your loan amount is split, so one part is variable, and the other is fixed. You decide on the proportion of variable and fixed. You enjoy some of the flexibility of a variable loan along with some of the certainty of a fixed rate loan.
Pros
- Your regular repayments will vary less if interest rates increase, making it easier to budget.
- If interest rates fall, your regular repayments on the variable portion will too.
- You can generally repay the variable part of the loan quicker if you wish.
Cons
- If interest rates rise, your regular repayments on the variable portion will too.
- Your additional repayments of the fixed rate portion will be limited.
- There may be significant break costs that you must pay if you exit the fixed portion of the loan early.
Interest Only
You repay only the interest on the amount borrowed usually for the first one to five years of the loan, although some lenders offer longer terms. At the end of the interest-only period, you begin to pay off both interest and principal.
Pros
- During the interest-only period, your monthly repayments are lower because you’re not paying off the principal.
- If it is not a fixed rate loan, there may be flexibility to pay off, and possibly redraw, the principal at your convenience during the interest-only period.
- These loans are especially popular with investors who plan to pay off the principal when the property is sold. This strategy is usually reliant on the property having achieved capital growth before it is sold.
Cons
- The overall cost of the loan is likely to be significantly higher.
- At the end of the interest-only period you have the same level of debt as when you started.
- If you’re not able to extend your interest-only period your repayments will increase at the end of the interest-only period.
- You could face a sudden increase in regular repayments at the end of the interest-only period when the loan changes to principal and interest.
Line of Credit
You can pay into and withdraw from your home loan every month, so long as you keep up the regular required repayments.
Pros
- You can use your income to help reduce interest charges and pay off your mortgage quicker.
- Provides great flexibility for you to access available funds and to have your salary paid into the line of credit account.
- Simplifies your banking into one account.
Cons
- Without proper monitoring and discipline, you won’t pay off the principal and will continue to carry or increase your level of debt.
- Line of credit loans usually carry higher interest rates than a standard variable mortgage
Introductory / Honeymoon Loans
Originally designed for first-home buyers, but now available more widely, introductory loans offer a discounted interest rate for the first 6 to 12 months, before the rate reverts to the usual variable interest rate.
Pros
- Lower regular repayments for an initial ‘honeymoon’ period
Cons
- Loans may have restrictions, such as no redraw facilities, for the entire length of the loan.
- When the honeymoon rate period ends a homeowner may be locked into an interest rate that is not as competitive as elsewhere.
- Some banks may charge early termination fees if you decide to switch to a new lender.
Low Doc Loans
Popular with self-employed people, these loans require less documentation or proof of income than most but often carry higher interest rates or require a larger deposit because of the perceived higher lender risk.
In most cases, you will be financially better off getting together full documentation for another type of loan. But if this isn’t possible, a low doc loan may be your best opportunity to borrow money.
Pros
- Alternative documentation may be accepted to support your loan application.
Cons
- You will probably pay higher interest than with other home loan types, or may need a larger deposit, or both.
SMSF Property Loans
An SMSF loan allows your Self-Managed Super Fund to borrow money to purchase a residential investment property. The property is held in a “Bare Trust” until the loan is repaid, ensuring the rest of your super assets remain protected. All rental income and capital growth flow directly back into your fund to help build your retirement nest egg.
Pros
- Pay less tax on your earnings. Rental income inside your fund is usually taxed at just 15%. Hold the property for more than a year, and the capital gains tax can drop to 10%, or even zero once you hit the pension phase.
- Your other super assets are protected. Because of the “limited recourse” structure, the lender can’t touch your fund’s other assets, like shares or cash, if the loan runs into trouble.
- Buy a bigger asset sooner. You don’t need to save the full purchase price. Use your existing super balance as a deposit to purchase a higher-value, tangible asset today.
Cons
- Higher interest rates. You’ll generally pay about 1.2% to 1.5% more than a standard investment loan. This reflects the extra risk and complexity the lender takes on with this structure.
- Strict “no-residency” rules. This is for investment only. Neither you nor your family can live in or rent the property at any time.
- Limited renovation options. While you can use borrowed money for essential repairs, you generally can’t use it for major improvements like extensions or adding a granny flat.
Commercial Property Loans
Commercial lending follows a different set of rules from a standard home loan. Whether you are buying an office, a warehouse, or a retail shop, the banks assess risk differently, focusing heavily on the property’s income potential and your stability. We’ll help you navigate the specialised criteria and guide you to a commercial loan that supports your long-term growth.
Pros
- Higher rental yields. Commercial properties generally offer higher annual returns compared to residential investments. With longer lease terms (often 3 to 10 years), you also benefit from greater income stability and built-in rent reviews.
- Tenant-funded outgoings. Unlike residential tenancies, commercial “net leases” often require the tenant to pay for rates, insurance, and maintenance. This keeps more of the rental income in your pocket as pure profit.
- Strategic business equity. If you are a business owner, buying your own premises converts a “dead” rent expense into an appreciating asset. You gain total control over the space and build equity in your own future.
Cons
- Larger deposit requirements. You’ll generally need more skin in the game. Lenders typically require a deposit between 25% and 35%, as they view commercial assets as higher risk than the family home.
- Longer vacancy periods. While leases are longer, finding a new tenant for a specialised warehouse or office can take significantly more time than finding a residential renter. You’ll need a solid cash buffer to cover the mortgage during these gaps.
- Sensitive valuations. The value of your property is closely tied to the strength of your tenant. if a major tenant leaves or a lease is near its end, the bank’s valuation of the building can drop, even if the physical structure hasn’t changed.
Construction Loans
A construction loan is a specialised mortgage designed for building or majorly renovating a home. Unlike a standard loan, where you get the money in one lump sum, a construction loan releases funds in stages as your builder reaches specific milestones. You only pay interest on the money you’ve actually used, helping you manage your budget while your project moves from blueprints to a finished front door.
Pros
- Pay interest only on what you use. Because funds are released in “draws” tied to your builder’s progress, you aren’t charged interest on the full loan amount from day one. This keeps your monthly costs much lower during the months of construction.
- Built-in quality control. Lenders often require an inspection before releasing a payment to the builder. This provides an extra layer of professional oversight, ensuring that the work is actually finished to a high standard before the invoice is paid.
- Flexibility for real-world delays. Construction rarely goes perfectly to plan. These loans are designed to be adjustable, meaning you won’t be penalised if a bit of bad weather or a council inspection pushes your timeline back.
Cons
- More complex paperwork. Lenders need to see council-approved plans, building permits, and a fixed-price contract before they say yes. It’s a more detailed application process than buying an existing home.
- Higher deposit requirements. Lenders generally view construction as higher risk. You’ll typically need a deposit of at least 20% of the total project value (land plus build), or significant equity in the land if you already own it.
- Variable cost risks. If you decide to change your mind on finishes or encounter unexpected site costs, you’ll usually need to cover those “variations” out of your own pocket. Lenders rarely increase the loan amount once the build has started.
Vacant Land Loans
A vacant land loan is designed for those who want to secure a piece of land now and build on it later. Financing raw land is different from a standard home loan because the bank has no building to use as security. It acts as a financial bridge, allowing you to lock in a location while you finalise your plans, permits, and builder for the future.
Pros
- Lock in today’s prices. In growing areas, land values often rise faster than you can save. Securing a land loan allows you to buy into a growth corridor now, building equity before you even break ground.
- Total development control. Owning the land outright gives you the freedom to develop on your own timeline. You aren’t rushed into a “house and land” package and can take the time to design a home that perfectly fits your vision.
- Lower initial overhead. Without a building on site, your entry costs and initial mortgage repayments are often lower than buying an established home, giving you more breathing room to save for your construction phase.
Cons
- Larger deposit requirements. Lenders view raw land as higher risk because it doesn’t generate rent. You’ll generally need a deposit of 20% to 30%, as most banks will only lend up to 70% of the land’s value.
- Stringent location criteria. Not all land is treated equal. Banks are much more comfortable lending on a block in a serviced residential estate than a “bush block” without power, water, or paved road access.
- No immediate tax deductions. Unlike an established investment property, you generally cannot claim the interest on your land loan as a tax deduction until the property is built and “available for rent,” which impacts your short-term cash flow.
Splt Rate Loans
Your loan amount is split, so one part is variable, and the other is fixed. You decide on the proportion of variable and fixed. You enjoy some of the flexibility of a variable loan along with some of the certainty of a fixed rate loan.
Pros
- Your regular repayments will vary less if interest rates increase, making it easier to budget.
- If interest rates fall, your regular repayments on the variable portion will too.
- You can generally repay the variable part of the loan quicker if you wish.
Cons
- If interest rates rise, your regular repayments on the variable portion will too.
- Your additional repayments of the fixed rate portion will be limited.
- There may be significant break costs that you must pay if you exit the fixed portion of the loan early.
Interest Only
You repay only the interest on the amount borrowed usually for the first one to five years of the loan, although some lenders offer longer terms. At the end of the interest-only period, you begin to pay off both interest and principal.
Pros
- During the interest-only period, your monthly repayments are lower because you’re not paying off the principal.
- If it is not a fixed rate loan, there may be flexibility to pay off, and possibly redraw, the principal at your convenience during the interest-only period.
- These loans are especially popular with investors who plan to pay off the principal when the property is sold. This strategy is usually reliant on the property having achieved capital growth before it is sold.
Cons
- The overall cost of the loan is likely to be significantly higher.
- At the end of the interest-only period you have the same level of debt as when you started.
- If you’re not able to extend your interest-only period your repayments will increase at the end of the interest-only period.
- You could face a sudden increase in regular repayments at the end of the interest-only period when the loan changes to principal and interest.
Line of Credit
You can pay into and withdraw from your home loan every month, so long as you keep up the regular required repayments.
Pros
- You can use your income to help reduce interest charges and pay off your mortgage quicker.
- Provides great flexibility for you to access available funds and to have your salary paid into the line of credit account.
- Simplifies your banking into one account.
Cons
- Without proper monitoring and discipline, you won’t pay off the principal and will continue to carry or increase your level of debt.
- Line of credit loans usually carry higher interest rates than a standard variable mortgage
Introductory / Honeymoon Loans
Originally designed for first-home buyers, but now available more widely, introductory loans offer a discounted interest rate for the first 6 to 12 months, before the rate reverts to the usual variable interest rate.
Pros
- Lower regular repayments for an initial ‘honeymoon’ period
Cons
- Loans may have restrictions, such as no redraw facilities, for the entire length of the loan.
- When the honeymoon rate period ends a homeowner may be locked into an interest rate that is not as competitive as elsewhere.
- Some banks may charge early termination fees if you decide to switch to a new lender.
Low Doc Loans
Popular with self-employed people, these loans require less documentation or proof of income than most but often carry higher interest rates or require a larger deposit because of the perceived higher lender risk.
In most cases, you will be financially better off getting together full documentation for another type of loan. But if this isn’t possible, a low doc loan may be your best opportunity to borrow money.
Pros
- Alternative documentation may be accepted to support your loan application.
Cons
- You will probably pay higher interest than with other home loan types, or may need a larger deposit, or both.