A number of different types of home loans are available. The one that is right for your needs will depend on your circumstances, but usually, most lenders offer several different types of home loans.

Remember, the different types of home loans each have various features that appeal to different borrowers. The key is to have the type of home loan that is right for your circumstances. Mortgage loans are used to buy a home or to borrow money against the value of a home you already own.

In simple words, a mortgage is the loan taken to pay for a home or other piece of real estate. Given the high cost of buying a property, almost every home buyer needs long-term financing to buy a home. Usually, mortgages have a fixed rate and you have to pay it over a duration of 15 or 30 years.

There are hundreds of home loan interest rate options for first home loans, next home loans and refinancing. This popular home loan quick guide explains what they are, along with pros and cons of each.

Different Types Of Home Loans

• Variable rate home loans
• Fixed rate home loans
• Interest-only home loans
• Split loans
• Basic home loan
• Introductory rate loans
• Guarantor Loans

Variable rate home loans

The most common type of loan in Australia is the standard variable loan. The official rate set by the Reserve Bank of Australia and funding costs determine how the interest rate will go up and down over the life of the loan. Some of the interest and the principal will be paid off with your regular payments. There is the potential to get a variable loan that has fewer loan features but will offer you a discounted interest rate.

The interest rate on variable rate home loans moves up or down based on market conditions. When home loan interest rates increase, borrower repayments automatically increase and vice versa. However, if rates decrease, it’s beneficial for borrowers to maintain their previous (i.e. higher) repayment level to pay off their debt more quickly.

Fixed rate home loans

The interest rate on this loan is fixed for a certain period—usually one to five years (or up to 10 years for investment properties). When that period's finishes, you may opt for another fixed rate period, or move to a variable rate.

The advantage of a fixed rate loan is you have the certainty of knowing exactly how much your repayments will be. Effectively, you're opting for security and certainty over flexibility. This helps with budgeting, but the main downside is that you won’t get the benefit of lower repayments if interest rates fall. Also if you break your loan before the fixed term expires, you could incur economic costs.

The interest rate on fixed-rate home loans stay the same for a defined period of time, usually 1-5 years. At the end of the fixed term, the borrower may have the option to choose another fixed term. Alternatively, the loan may automatically convert to their lender’s current variable rate;

It’s possible for fixed rates to be higher or lower than the variable rates on offer in the market. For example, if the fixed rates are lower, it’s a sign that lenders believe that the variable rates will fall further in the future, and vice versa.

A fixed interest rate loan means that your repayments will not fluctuate with a change in the interest rate. A fixed rate is set for a certain length of time. At the end of that time you can decide if you will fix the rate again, depending on what your lender is offering, or change over to a variable home loan.

Interest-only home loans

As the name indicates, instead of paying off both the principal and the interest your repayments will only pay off the interest. These types of loans are usually only offered in the first 1 – 5 years of a loan although there are some lenders that offer longer periods. At the end of the agreed period your repayments will again cover both the interest and the principle.

Interest-only home loans require the borrower to just make interest and fee repayments for a defined period (usually up to five years). There is no reduction of the principal (i.e. the amount borrowed) during this time. At the end of the interest-only period, the loan typically reverts to a standard principal and interest (P and I) repayment arrangement until the outstanding balance

Split loans

In a split loan, part of your mortgage is fixed and part of it is variable. So, you’ve got some protection from rising rates but you still benefit if rates drop. It’s like the best of both worlds.

If you like the certainty of fixed repayments, but also want features like a 100% offset, then this loan is for you. A split loan is part fixed and part variable, so you get the best of both options.

A split rate loan is a combination of both a variable and fixed rate loans. You choose how much of your loan will be at set at a fixed interest and how much will be on a variable interest.

Basic home loan

Basic home loans are cheaper than a standard loan because they have fewer features. They also usually have a variable rate. But ‘basic’ means different things to different lenders so make sure you understand what you’re getting.

This is a ‘no frills’ product that offers a very low variable interest rate with little or no regular fees. However, if you want flexibility, such as a redraw facility, you may need to pay extra.

Introductory rate loans

Some credit card companies, mortgage lenders and other financial institutions offer consumers a teaser rate or introductory interest rate to open new accounts. An introductory rate is a temporary interest rate that may last for a number of months or one year, depending on the offer. Federal laws governing credit card offers stipulate that the introductory rate must last for a minimum of six months.

The interest rate is usually low to attract borrowers. Also known as a honeymoon rate, this rate generally lasts only for around 12 months before it rises. Rates can be fixed or capped. Most revert to the standard rates at the end of the honeymoon period.

Guarantor Loans

A guarantor is a financial term describing an individual who promises to pay a borrower's debt in the event that the borrower defaults on their loan obligation. Guarantors pledge their own assets as collateral against the loans. On rare occasions, individuals act as their own guarantors, by pledging their own assets against the loan.

A guarantor is a financial term describing an individual who promises to pay a borrower's debt in the event that the borrower defaults on their loan obligation. Guarantors pledge their own assets as collateral against the loans. On rare occasions, individuals act as their own guarantors, by pledging their own assets against the loan.