Types of home loans in Australia explained
Everyone's financial needs differ. With many home loan types, whether you're renovating or seeking a lower rate, there's a fit for you.
There are several types of home loans in Australia. The type of home loan you choose may depend on how you plan to use the property, how you want to repay, and what features matter to you.
This guide covers each loan type, explains how it works, and highlights the key differences to help you compare your options.
What are the main types of home loans in Australia?
The main types of home loans in Australia are variable rate, fixed rate, and split loans. Beyond these, borrowers can choose from principal and interest, interest-only, owner-occupier, investment, low deposit, guarantor, construction, and first home buyer loans.
Each type suits a different financial situation. Some offer repayment certainty. Others prioritise flexibility or lower upfront costs.
Variable rate home loans
A variable rate home loan has an interest rate that moves up or down over the life of the loan. Lenders may adjust rates over time, including in response to changes in market conditions and the Reserve Bank of Australia (RBA) cash rate.
Variable rate loans typically include (but not always) features that help you manage your loan:
- Extra repayments - pay more than the minimum may help reduce your loan balance over time
- Redraw facility - access extra repayments you’ve made if you need the funds later.
- Offset accounts - a linked transaction account that reduces the balance your interest is calculated on (not available with all lenders)
When interest rates change, your repayments may also change depending on your loan structure and settings.
Please note that Unloan does not offer offset accounts.
Fixed rate home loans
A fixed rate home loan locks your interest rate for a set period, usually one to five years. During that time, your repayments don’t change during the fixed period, regardless of changes to the RBA cash rate, subject to the loan terms.
Fixed rates can provide more certainty around your repayments during the fixed period. The trade-off is less flexibility. Most fixed rate loans have a limit on extra repayments set by the lender and charge break costs if you exit or repay the loan early.
Please note that Unloan does not offer fixed rate home loans.
What happens when your fixed rate period ends?
When your fixed period ends, your loan converts to a variable rate. At that point, you may be able to fix your rate again for another period at the rates available, or refinance to another lender. It’s worth reviewing your options before the fixed rate period expires.
Split home loans
A split home loan divides your borrowing between a fixed rate portion and a variable rate portion. You choose the split, for example, 50/50 or 70/30.
The fixed portion gives you repayment certainty. The variable portion lets you make extra repayments and access a redraw facility.
For example, on a loan split between fixed and variable portions, part of the balance may be fixed for stability, while the remaining portion stays variable for flexibility.
Please note that Unloan does not offer split loans.
Comparing variable, fixed & split loans
Please note features and availability may vary depending on the lender and loan product.
Principal and interest home loans
Principal and interest (P&I) is the most common repayment structure for Australian home loans. Each repayment covers two parts:
- Principal - reduces the amount you originally borrowed
- Interest - the cost your lender charges for lending you the money
Early in the loan, most of your repayment goes toward interest. Over time, more goes toward paying down the principal.
Interest-only home loans
An interest-only home loan means you pay only the interest for a set period, usually up to five years. During this time, your loan balance does not decrease because you are not repaying any principal.
When the interest-only period ends, your repayments may increase because you start repaying principal and interest on a shorter remaining term. This can be a significant increase.
Interest-only payments are usually lower during the interest-only period compared to principal and interest repayments. However, the loan balance does not reduce during this time.
Owner-occupier home loans
An owner-occupier home loan is for borrowers buying a property to live in as their primary residence. Interest rates and features may differ between owner-occupier and investment loans depending on the lender.
You can generally choose variable, fixed, or split rates, and repay with principal and interest or interest-only, depending on the lender.
Investment home loans
An investment home loan is for borrowers purchasing a property to rent out, not to live in. Interest rates are usually higher than owner-occupier rates because lenders view investment lending as higher risk.
When assessing your application, lenders consider your rental income, existing debts, and investment expenses alongside your regular income.
Low deposit home loans
A low deposit home loan lets you buy a property with less than a 20% deposit. If your deposit is below 20%, your loan-to-value ratio (LVR) exceeds 80%, which may result in Lender’s Mortgage Insurance (LMI) applying. LMI is a one-off premium payable for the borrower that helps protects the lender, if you can’t repay the loan.
Guarantor home loans
A guarantor home loan uses a family member’s property as additional security for your loan. The guarantor doesn’t give you cash, they pledge equity in their own home.
This may reduce the deposit required by reducing or eliminating the need for a large deposit. In some cases, this may help you avoid paying LMI, depending on the lender’s criteria.
If you’re unable to make repayments, the guarantor may be responsible for the amount they’ve guaranteed. A guarantee is a legal commitment, and guarantors should seek independent legal and financial advice before agreeing.
Construction home loans
A construction loan is for borrowers building a new home or undertaking major renovations. Instead of receiving the full loan amount upfront, funds are released in stages as construction progresses. This is called progressive drawdown or progress payments.
You may only pay interest on the amount drawn down so far, not the full loan balance. Once construction is complete, the loan usually converts to a standard home loan with principal and interest repayments.
Construction loans often require additional documentation, including building contracts, council-approved plans, and a fixed-price building agreement.
Please note that Unloan does not offer construction loans.
What to consider when choosing a type of home loan
The right home loan depends on your property goal, income stability, and appetite for risk. Consider starting with these three questions:
- Will you live in the property or rent it out? This determines whether you need an owner-occupier or investment loan.
- Do you want certainty or flexibility? Fixed rates lock in repayments. Variable rates let you make extra repayments and access redraw.
- How much deposit do you have? If it’s below 20%, factor in LMI costs or explore guarantor options to avoid it.
Once you’ve narrowed down the type, you can start comparing interest rates, fees, and features across lenders.
Use Unloan’s borrowing power calculator to see how much you could borrow, or the repayment calculator to estimate your monthly repayments.
Can you change your home loan type?
In some cases, you may be able to change your home loan type by refinancing your loan. This involves replacing your current loan with a new one, either with the same lender or a different one.
Any changes, including between owner-occupier and investment loans, depend on how the property is used and are subject to the lender’s criteria and approval.
How Unloan home loans work
Unloan is a digital home lender and a division of Commonwealth Bank of Australia. It offers variable rate home loans for owner-occupiers and investors, with a focus on simplicity and low cost.
Key features include:
- No application fees, no ongoing fees, and no exit fees*
- Unlimited extra repayments with fee-free redraw
- An annual loyalty discount that increases by 0.01% p.a. each year, up to a maximum 0.30% p.a. discount
- Apply in minutes online
Unloan is a division of Commonwealth Bank of Australia.
Applications are subject to credit approval, satisfactory security and you must have a minimum 20% equity in the property. Minimum loan amount $10,000, maximum loan amount $10,000,000, and total borrowings per customer across all Unloan loans is $10,000,000. If you currently have an Unloan home loan with an active Lender’s Mortgage Insurance (LMI) policy the maximum amount you can borrow across all Unloan loans is $3,000,000. Please note Unloan currently doesn’t offer loans with an LMI premium. In some cases, depending on the property’s location or type, we may only be able to lend you up to 70% of the property’s value.
Unloan offers a 0.01% per annum loyalty discount on the Unloan Live-In rate or Unloan Invest rate upon settlement. On each anniversary of your loan’s settlement date (or the day prior to the anniversary of your loan’s settlement date if your loan settled on 29th February and it is a leap year) the margin discount will increase by a further 0.01% per annum up to a maximum discount of 0.30% per annum. Unloan may withdraw this discount at any time. The loyalty discount is applied for each loan you have with Unloan.
*At Unloan, we do not charge any annual, application, banking, account, transaction, late or exit fees. Government fees may also apply. Learn more about government fees here. Your current lender may charge an exit fee when refinancing.
Unloan is a division of Commonwealth Bank of Australia, and Commonwealth Bank does not provide tax (financial) advice under the Tax Agent Services Act 2009 (Cth). You should consider seeking independent tax advice from a registered tax agent, accountant or adviser before you make any decisions based on this information.
Applications are subject to credit approval, satisfactory security and you must have a minimum 20% equity in the property. Minimum loan amount $10,000, maximum loan amount $10,000,000, and total borrowings per customer across all Unloan loans is $10,000,000. If you currently have an Unloan home loan with an active Lender’s Mortgage Insurance (LMI) policy the maximum amount you can borrow across all Unloan loans is $3,000,000. Please note Unloan currently doesn’t offer loans with an LMI premium. In some cases, depending on the property’s location or type, we may only be able to lend you up to 70% of the property’s value.
Unloan offers a 0.01% per annum loyalty discount on the Unloan Live-In rate or Unloan Invest rate upon settlement. On each anniversary of your loan’s settlement date (or the day prior to the anniversary of your loan’s settlement date if your loan settled on 29th February and it is a leap year) the margin discount will increase by a further 0.01% per annum up to a maximum discount of 0.30% per annum. Unloan may withdraw this discount at any time. The loyalty discount is applied for each loan you have with Unloan.
*At Unloan, we do not charge any annual, application, banking, account, transaction, late or exit fees. Government fees may also apply. Learn more about government fees here. Your current lender may charge an exit fee when refinancing.
Applications are subject to credit approval, satisfactory security and minimum deposit requirements. Full terms and conditions are found on our Unloan Terms and Conditions. Modified Terms and Conditions will be set out in our Notice of Variation Agreement, if you are approved. This article is intended to provide general information only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice.
Unloan offers a 0.01% per annum loyalty discount on the Unloan Live-In rate or Unloan Invest rate upon settlement. On each anniversary of your loan’s settlement date (or the day prior to the anniversary of your loan’s settlement date if your loan settled on 29th February and it is a leap year) the margin discount will increase by a further 0.01% per annum up to a maximum discount of 0.30% per annum. Unloan may withdraw this discount at any time. The loyalty discount is applied for each loan you have with Unloan.
*At Unloan, we do not charge any annual, application, banking, account, transaction, late or exit fees. Government fees may also apply. Learn more about government fees here. Your current lender may charge an exit fee when refinancing.
