Types of Home Loans in Australia Explained: A Complete Guide

Choosing the right home loan is just as important as choosing the right property. With dozens of mortgage products available from banks, credit unions, and online lenders, understanding the different types of home loans in Australia will help you find the structure that best fits your financial situation, risk tolerance, and long-term goals.

This guide explains every major mortgage type available in Australia, including the pros, cons, and who each one suits best.

Variable Rate Home Loans

A variable rate loan has an interest rate that fluctuates based on market conditions and the lender's decisions. When the Reserve Bank of Australia (RBA) changes the cash rate, variable rates typically move in the same direction — though lenders are not required to pass on rate changes in full.

• Pros: Flexibility to make extra repayments without penalties, access to offset accounts and redraw facilities, rates may decrease if the RBA cuts the cash rate
• Cons: Repayments can increase unpredictably when rates rise, harder to budget with fluctuating payments
• Best for: Borrowers who want flexibility, plan to make extra repayments, and can absorb potential rate increases

Fixed Rate Home Loans

A fixed rate loan locks in your interest rate for a set period, typically 1 to 5 years. Your repayments remain the same regardless of what happens to market rates during the fixed period. At the end of the fixed term, the loan usually reverts to the lender's standard variable rate unless you negotiate a new fixed rate or refinance.

• Pros: Predictable repayments make budgeting easier, protection against rate increases during the fixed period
• Cons: Break costs can be substantial if you want to refinance or sell during the fixed period, limited or no ability to make extra repayments, you miss out if rates fall
• Best for: Borrowers who prioritise certainty, are on a tight budget, or believe rates will rise

Split Loans

A split loan divides your mortgage into two portions — one fixed and one variable. For example, you might fix 60% of your loan to lock in repayment certainty while keeping 40% variable to retain flexibility for extra repayments and access to an offset account.

• Pros: Balances security and flexibility, partial protection against rate rises while retaining some variable features
• Cons: More complex to manage, break costs still apply to the fixed portion, you may not fully benefit from rate drops
• Best for: Borrowers who want a hedge — some certainty with some flexibility. A popular choice in uncertain rate environments

Interest-Only Home Loans

With an interest-only loan, you only pay the interest on the loan for a set period (typically 1 to 5 years). You do not pay down the principal during this time. After the interest-only period ends, the loan converts to principal and interest repayments — and because you have not reduced the principal, these repayments will be higher than if you had been paying principal and interest from the start.

• Pros: Lower repayments during the interest-only period, frees up cash flow for other investments or expenses
• Cons: You build no equity during the interest-only period, total interest paid over the life of the loan is significantly higher, repayment shock when converting to principal and interest
• Best for: Property investors (interest payments on investment properties are tax-deductible), borrowers with short-term cash flow constraints who have a clear plan to transition to full repayments

Principal and Interest Home Loans

The standard loan structure where each repayment includes both interest and a portion of the principal. Over the life of the loan (typically 25 to 30 years), you gradually pay off the entire debt. In the early years, most of your repayment goes toward interest. Over time, a greater proportion goes toward reducing the principal.

• Pros: You build equity from day one, total interest paid is lower than interest-only, most lenders offer better rates for P&I loans
• Cons: Higher repayments than interest-only in the short term
• Best for: Owner-occupiers, first-home buyers, and anyone focused on paying off their home over time. This is the most common and generally recommended structure for homeowners

Offset Accounts

An offset account is a transaction account linked to your home loan. The balance in the offset account is "offset" against your loan balance when calculating interest. For example, if you have a $500,000 loan and $50,000 in your offset account, you only pay interest on $450,000.

• Pros: Reduces interest without locking money away, funds remain accessible, effectively provides a tax-free return equal to your home loan rate
• Cons: Loans with offset accounts sometimes carry a slightly higher interest rate or monthly account fees, requires discipline to keep a meaningful balance in the account
• Best for: Borrowers with savings they want to keep accessible, particularly effective for those with large cash balances (emergency funds, business income, or tax provisions)

Redraw Facilities

A redraw facility allows you to make extra repayments on your loan and then withdraw (redraw) those extra funds if needed. Unlike an offset account, the extra repayments directly reduce your loan balance, and you must actively request a redraw to access the funds.

• Pros: Reduces your loan balance and interest costs, provides a safety net if you need funds later, usually no additional fees
• Cons: Some lenders impose minimum redraw amounts or fees, funds are not as instantly accessible as an offset account, redrawn amounts for investment properties may have different tax implications
• Best for: Borrowers who want to pay off their loan faster but want the option to access extra funds in an emergency

Low-Doc Home Loans

Low-documentation (low-doc) loans are designed for self-employed borrowers who cannot provide the standard income documentation (payslips, tax returns for the past two years) required for a standard loan. Instead, borrowers may provide alternative evidence of income such as Business Activity Statements (BAS), accountant declarations, or bank statements.

• Pros: Accessible to self-employed borrowers and contractors, streamlined documentation requirements
• Cons: Higher interest rates (typically 0.5% - 1% above standard rates), lower maximum loan-to-value ratios (usually 60-80%), fewer lenders offer these products
• Best for: Self-employed borrowers, freelancers, and small business owners with strong income but non-standard documentation

Guarantor Home Loans

A guarantor loan allows a family member (usually a parent) to use the equity in their own property as additional security for your loan. This can enable you to borrow more than you could on your own, often up to 100% of the purchase price plus costs — eliminating the need for a deposit and avoiding Lenders Mortgage Insurance (LMI).

• Pros: Buy sooner without a full deposit, avoid LMI (saving potentially $10,000 - $30,000), borrow up to 100% or more of the property value
• Cons: The guarantor's property is at risk if you default, can strain family relationships, the guarantor's borrowing capacity is reduced while the guarantee is in place
• Best for: First-home buyers with stable income but insufficient savings for a deposit, particularly in expensive markets like Sydney and Melbourne

Construction Loans

A construction loan is designed for borrowers who are building a new home or undertaking major renovations. Unlike a standard loan where you receive the full amount at settlement, a construction loan is drawn down in stages as the build progresses. You only pay interest on the amount drawn, not the full loan amount, during the construction phase.

• Pros: Interest is charged only on drawn funds during construction, payments align with build progress, lender monitors construction to protect your investment
• Cons: More complex application process, requires detailed building plans and fixed-price contracts, potential for cost overruns if the build encounters problems, variable rate only during construction for most lenders
• Best for: Borrowers building a new home, undertaking a knockdown-rebuild, or completing major renovations. See our Building a New Home Guide for more on the construction process

How to Choose the Right Loan Type

The right mortgage structure depends on your individual circumstances. Consider the following:

Related Resources

• Home Loan and Finance Guide — Complete guide to getting your finance approved
• First Home Buyer's Guide — Step-by-step guide for first-time buyers
• Stamp Duty Calculator — Calculate your upfront costs by state

This guide is for general information only and does not constitute financial advice. Always consult a qualified mortgage broker or financial adviser before making decisions about your home loan.