Insights · Property and lending
Understanding different types of home loans
Home loans come in more varieties than most buyers expect, and the choice affects how much interest you pay, how flexible the loan is, and even your tax if the home becomes an investment later. Here’s what the main options mean.
Variable rate
The interest rate moves up or down with the lender’s rates, which usually follow the Reserve Bank’s cash rate.
- For: usually allows unlimited extra repayments, an offset account and redraw; no break costs if you sell or refinance.
- Against: repayments rise when rates rise, which makes budgeting harder.
Fixed rate
The rate is locked for a set period, typically one to five years, then reverts to a variable rate.
- For: certainty of repayments for the fixed term.
- Against: extra repayments are usually capped, offset is often unavailable, and breaking the loan early (selling, refinancing) can cost break fees. If rates fall, you don’t benefit.
When a fixed term ends, the loan rolls onto the lender’s standard variable rate, which is often higher than what it offers new customers. Diarise the date and review the loan a couple of months beforehand.
Split loan
Part fixed, part variable. You get some certainty on part of the debt and flexibility (extra repayments, offset) on the rest. A common middle ground for first home buyers.
Principal and interest versus interest-only
Principal and interest repayments pay off the debt over the loan term, usually 30 years. This is standard for a home you live in.
Interest-only repayments cover only the interest for a period, typically up to five years, so the debt doesn’t reduce. Repayments are lower at first but jump when the interest-only period ends, and interest-only rates are usually higher. It’s mostly used for investment loans.
Offset account
A transaction account linked to your loan. The balance is “offset” against the loan when interest is calculated, so $30,000 in offset on a $600,000 loan means you’re charged interest on $570,000. Your salary can go into it and you can spend from it as normal.
An offset account matters for tax if you might ever keep this home and rent it out: money in an offset account is still your savings, so the loan balance (and the deductible interest) stays intact if the property becomes an investment.
Redraw
Lets you take back extra repayments you’ve made into the loan. It saves interest the same way offset does, but money redrawn later is treated as new borrowing, and its tax deductibility depends on what you use it for. Some lenders also limit or charge for redraws.
Basic versus package loans
Basic loans have a lower rate and few features. Package loans bundle an offset account, credit card and rate discount for an annual fee. Whether the package is worth it depends on how much you’d keep in offset.
Construction loans
For building a home, the lender pays the builder in stages (progress payments) as each stage is completed, and you pay interest only on what’s been drawn. Once the build is finished, it converts to a normal loan.
The rate isn’t everything
Compare the comparison rate, which includes most fees, as well as the headline rate. Then look at the features you’ll actually use, how the lender assesses your income, and the costs of exiting the loan.
Judge Lending compares loans from a range of lenders and explains the trade-offs, with your accountant involved where the structure affects your tax. See home loans, and how much deposit you need.