A summary of various home loan types on the market

Buying a property is a major financial decision, and choosing the right home loan is just as important as selecting the perfect house. Home loans come in various types, each catering to different needs and financial situations. Understanding these options can help you find a loan that aligns with your goals and financial stability.

Fixed vs variable rate home loans

One of the first decisions you'll make when selecting a home loan is whether to go with a fixed or variable interest rate.

Fixed-rate home loans: These loans lock in an interest rate for a set period, usually between 1 to 5 years. This means your repayments remain consistent, making it easier to budget. However, fixed loans may have limitations, such as fewer extra repayment options and break fees if you refinance before the fixed term ends.

For example: If you secure a fixed rate of 5% for three years, your repayments won't change even if the market interest rates rise or fall during this period.

Variable-rate home loans: The interest rate on these loans fluctuates based on market conditions, often following the Reserve Bank of Australia's (RBA) cash rate. While this means you could benefit from rate cuts, there's also the risk of rising repayments if interest rates increase.

For example, if the RBA raises the cash rate and your lender follows suit, your interest rate may increase further.

Some lenders also offer split home loans, allowing you to divide your loan into fixed and variable portions for a balance of stability and flexibility.

Owner-occupied vs. investment loans

The type of property you buy and how you plan to use it will determine whether you need an owner-occupied or an investment home loan. Each loan type has different interest rates, repayment options, and eligibility criteria.

Owner-occupied home loans
Owner-occupied loans are designed for buyers who plan to live in the property. These loans generally have lower interest rates and fewer fees because lenders see them as less risky. Repayment options typically include principal and interest (P&I) payments, which help borrowers build equity over time while paying down the loan.

Investment home loans
If you're buying a property to rent out or hold as an investment, you’ll need an investment loan. These loans usually have higher interest rates as lenders consider them riskier, but they often come with flexible repayment structures. Borrowers may choose principal and interest repayments to steadily reduce the loan balance or opt for interest-only repayments to keep costs low and maximise rental income. While interest-only payments improve short-term cash flow, they don’t reduce the principal, meaning borrowers may pay more interest over time.

Construction loan

If you're planning to build a home rather than buy an existing one, a construction loan might be the right fit. Instead of receiving the full loan amount upfront, the lender releases funds in stages based on the progress of construction.

Key features:

• Payments are made in increments as construction progresses (e.g., for foundation, framing, roofing, and finishing touches).
• Typically, only interest is charged on the amount drawn down, reducing initial repayment burdens.

Bridging finance

A bridging loan is designed for homeowners who want to buy a new property before selling their existing one. It provides short-term financing, helping to cover the gap between purchasing a new home and receiving the proceeds from a property sale.

Key considerations:

• Usually an interest-only loan with a term of 6–12 months.
• Higher interest rates than standard home loans.
• If the existing property doesn't sell quickly, you may face financial strain.

Low doc loans

Self-employed individuals or freelancers often struggle to meet traditional loan documentation requirements, such as payslips and tax returns. Low doc (low documentation) loans can help these borrowers access financing by allowing alternative proof of income.

Accepted documents may include:

• Business activity statements (BAS).
• Accountant declarations.
• Bank statements showing income flow.

SMSF loans

Self-managed super funds (SMSFs) can be used to purchase investment properties through SMSF loans. The property is held within the fund, and rental income contributes to the borrower's retirement savings.

Key considerations:

• Strict lending rules apply.
• The property must be for investment purposes only.
• The deposit requirement may be higher compared to regular investment loans.

Bad credit home loans

Borrowers with poor credit histories may struggle to secure a mortgage with major lenders, but specialist lenders offer bad credit home loans to help them get onto the property ladder. However, lenders will only approve these loans if they are confident in your ability to repay. Interest rates are usually higher, but once your credit score improves, you may refinance to a standard home loan with better terms.

How to improve approval chances:

• Provide a larger deposit to reduce lender risk.
• Show improved financial habits, such as clearing past debts and maintaining stable employment.
• Consider a guarantor loan, where a family member offers security for your mortgage.

Reverse mortgage

For homeowners aged 60 and above, a reverse mortgage allows access to the equity in their home without requiring repayments while they continue to live in the property. This can provide financial flexibility for retirees who need funds for medical expenses, home renovations, or general living costs.

Key features:

• Borrow as a lump sum, regular income, or line of credit.
• Interest compounds over time, increasing the loan balance.
• The loan is repaid when the borrower sells the property or passes away.

Note: All reverse mortgages must come with a negative equity protection, ensuring the borrower (or their estate) will never owe more than the home's sale value.

Finding the right home loan for your situation

Finding the right home loan depends on your financial goals, property plans, and borrowing capacity. With so many loan options available, it's crucial to compare interest rates, repayment structures, fees, and loan features like offset accounts and extra repayment options.

If you're unsure which loan is best for you, Bheja.ai can simplify the process. Using AI-driven insights, Bheja.ai helps assess your financial position, provides tailored home loan recommendations, and even suggests ways to improve your borrowing power. Whether you're a first-time buyer, investor, or retiree, Bheja.ai offers smart, data-backed guidance to help you make informed decisions.