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Home loan types

There are so many home loan types in Australia, including a range of specialised products like construction loans, low doc loans and lines of credit.

Here's a quick break down of all the major home loan types in Australia. We've included the most common types like owner occupier and investment loans, plus more specialised product types. Keep in mind that these loan types aren't always totally separate either. You can have a fixed rate loan that's also a construction loan, or a low doc loan that's also an owner-occupier loan.

Loan purpose: investor or owner-occupier

One way to distinguish home loan types is by purpose. If you're buying a home to live in, you need an owner-occupier loan. If you're purchasing a property as an investment, then you need an investment loan.

Loans for investors and owner-occupiers often have all the same features and can be either fixed or variable, with interest-only or principal-and-interest repayments. The main difference is investor loans have higher interest rates.

Rate type: fixed and variable

Mortgages with variable interest rates are the most common type of mortgage in Australia, especially for owner-occupiers. They're flexible products but the rate can change at any time.

Unlike variable loans, loans with fixed interest rates won't change for a set period of time (the fixed period). This means your repayments stay the same. After this period, the loan reverts to a variable rate.

It's easier to exit a variable rate loan and refinance to a new mortgage. Exiting a fixed rate loan comes with breaking costs.

Learn more about fixed versus variable loans

Repayment type: principal-and-interest or interest-only

Most home loans have principal-and-interest repayments. With these loans, you borrow money (the principal) and repay it with interest charged on top.

The alternative is interest-only repayments. Here, you delay repaying the loan principal for the first few years of the loan. This means your repayments are much cheaper at the start. But they jump up sharply later because you have to repay the loan eventually.

Construction loans

When you're borrowing money to build a home, you'll need a construction loan. These loans require repayments at different stages as construction progresses.

Line of credit loans

If you already own a property and have paid off some or all of the mortgage, you have something called home equity. You can use a line of credit loan to borrow against this equity.

This can be a good way to fund a purchase such as a renovation or a holiday.

Bad credit mortgages

It's hard to get an ordinary mortgage if you've had credit trouble in the past. Bad credit loans allow you to secure finance even if you have some negative marks on your credit history.

Lenders who deal in these loans typically take a more hands-on approach to assessing your credit file and take into account the circumstances that led to your poor credit history. However, be aware that these loans often carry higher interest rates.

Low doc home loans

A home loan application requires evidence of your employment and regular income. This is easy if you're a full-time salaried employee (in other words, a PAYG borrower). It's harder if you're self-employed. Low-doc loans exist to help these borrowers.

You can apply for a low doc loan with a letter from your accountant, Business Activity Statements (BAS), income declaration forms or other types of documentation to show your earnings. Interest rates are often higher with these loans.

Non-conforming loans

The term non-conforming loan covers a range of borrowers, including those with bad credit histories, borrowers who are retired or have no credit history.

SMSF loans

Self-managed superannuation funds (SMSFs) allow investors to take control of their retirement savings and invest them in property.

Many lenders offer home loans for SMSF property investment. These loans are structured like normal home loans, though the structuring of the actual SMSF for property investment can be fairly complicated.

Reverse Mortgages

Older borrowers (60 and above) looking to fund retirement costs without selling their home can take out a reverse mortgage. You borrow against the value of your property and when you sell the property (or when your heirs sell after your death), the lender gets repaid.

Bridging loans

What do you do when you've bought a new house, but you haven't sold your old one yet? Or what if you've sold but the settlement dates don't line up, meaning you don't have money to cover the purchase?

A bridging loan will help you cover this shortfall. You pay interest with an interest-only rate and then pay the loan off when your sale is finalised.

Tracker mortgages

A tracker loan is a type of variable rate home loan that follows the official cash rate set by the RBA. The loan's interest rate is set, usually at a certain level above the cash rate, and then follows the movement of the cash rate up or down each month.

Say for example your lender sets the tracker loan's rate at 2.00% above the cash rate. If the cash rate is 1.50% then your loan's rate is 3.50%. If the cash rate falls to 1.25%, your loan's rate falls to 3.25%.

Tracker mortgages are very rare in the Australian market.

Still confused which home loan type suits your requirements? You can also get guidance from an expert mortgage broker.

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