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Loan Type Explained

What types of home loans are there?
The most common home loans are variable-rate loans, fixed-rate loans and split loans. We explain all three types below, along with its pros and cons.

Definition: Pros: Cons:
Variable rate These rates track movements in the official cash rate, which is set by the Reserve Bank of Australia. Your repayments and the loan’s interest rate will fluctuate with the official cash rates.
  • Likely to be slightly lower than a fixed rate.
  • Able to make extra repayments.
  • Unlikely to be any exit fees.
  • Your repayments may fluctuate with interest rate changes – this makes budgeting more difficult.
Fixed rate The interest rate and your repayments will stay the same for a fixed period of the loan, usually one, three or five years.
  • Your repayments are known and will stay the same for the fixed period of time, making it easier to budget.
  • Rates are usually higher than the variable rates.
  • Usually an exit fee if you exit the loan before the end of the term.
  • Usually can’t make extra repayments or redraw without penalty.
Split Loan A portion of your loan will have a fixed rate and the other portion will be under a variable rate, taking advantage of both types of loans.
  • Repayments are flexible.
  • Allows access to variable loan features like redraws and extra repayments.
  • May need to pay two set of establishment and ongoing fees,
  • The loan on the fixed rate will be higher than the variable rate.


Other  types of home loans

Loan Type ExplainedHoneymoon or introductory home loan

Many lenders offer a honeymoon or introductory rate. This is a discount rate that is significantly lower than the variable interest rate but applies for only 6 to 12 months. After that period the honeymoon rate reverts to the standard variable rate.

You need to ensure the long-term higher repayments over the life of the loan do not exceed the short-term benefits.

Professional packages

Majority of lenders offer packages called “professional packages” to borrowers of certain professions or income level. They are offered a discounted rate off the standard variable or have certain fees waived.

Low-doc loans

Low doc stands for low documentation. These loans are mostly for self-employed people who don’t have all the financial documents normally required to get a loan. Instead they sign a Borrowers Income Declaration. The rate is generally higher than a standard variable or fixed loan due to the higher risk involved.

Line of credit/equity home loan

This type of loan allows you to withdraw from a fixed amount at any time, to pay for whatever you want – this could be for shares, renovations, or even a holiday. It’s like having a credit card with a big limit, but your home still acts as security for the loan. You only pay interest on the funds you use, but you need strong financial discipline to ensure you pay off the principal as well as the interest.