Common types of home loans

With multiple home loans on the market today, get up to speed with what they are, how they differ and when they may overlap.

Different lenders offer different types of home loans. And, depending on whether you’re after a basic home loan or one with added features, offerings can vary a lot when it comes to interest rates and fees.

If you’re new to property, or have been in the market for a while, we break down some of the common home loan types available, bearing in mind some of the loans mentioned below can overlap.

Principal and interest loan                                  

With a principal and interest loan, you’ll make repayments that cover both the principal (which is the amount you borrowed to buy the property) and the interest (which is the additional amount you’re charged by your lender for borrowing the initial amount).

Interest-only loan

An interest-only loan is where you only make repayments on the interest, not the principal, for a specified period of time. While this may mean you pay lower monthly repayments, your loan balance does not get paid off and you’ll retain the same level of debt as when you took out the loan.

Fixed rate loan

This type of loan is where you fix your interest rate for a set period and it gives you the certainty of knowing your regular repayments will stay the same over the specified timeframe. The downside is you’re unable to take advantage of lower interest rates if there is a rate drop. And, if you change lenders or pay off your home loan during the fixed term, you may be charged break fees.

Variable rate loan

With a variable rate loan your repayment amounts could go up or down depending on whether your lender adjusts its rates. If rates drop you may benefit from a lower interest rate but if they increase, so might your minimum monthly repayments. Meanwhile, these loans generally have no restrictions or penalties for making additional repayments so you may be in a position to pay off your loan sooner.

Split rate loan

If you like the sound of both a fixed and variable rate, a split rate loan can provide the certainty of a fixed interest rate and the flexibility of a variable rate in one. It means you can pay off part of your loan sooner and have some protection against the potential of interest rate rises.

Introductory home loan

Introductory or honeymoon rate home loans are designed with first home buyers in mind. They offer a low interest rate for a period of time, often 12 months, which helps keep repayments down.

Land loan

These types of loans can be used to purchase vacant blocks of land. Generally, the land must be non-income producing, while conditions may apply depending on the size of the land you buy. Typically you don’t have to build straight away which may be the case with a construction loan.

Construction or renovation loan

Designed especially for homeowners looking at building a new home or making improvements to their existing one, this type of loan generally covers the construction period for 12 months while you drawdown the funds as you need them to reflect various phases of building.

Bridging loan

A bridging loan provides you with the funds needed to buy your new home before you’ve sold your old one. The time limit on these loans, which is generally short, could however create an issue if you have trouble selling your existing property or if there is a delay with settlement.

Low-doc loan

These are home loans generally designed for self-employed people who don’t have all the financial documents providing proof of income normally required to secure a home loan. They often carry higher interest rates or require a larger deposit because of the perceived greater risk for the lender.

Line of credit loan

A line of credit loan allows you to borrow money using the equity in your home. As you’re effectively increasing the amount you owe to your lender and using your home as security, it’s wise to think about the long-term impact of taking on added debt.

Reverse mortgage

A reverse mortgage allows you to borrow against the value of your home while you still live in it. This type of loan is generally for older people, to help fund their cost of living in retirement. You can choose a lump sum, regular income stream or combination of options. Unlike a normal loan you don’t have to make regular repayments. The interest on the loan compounds over time and typically—once you sell your home or die—the loan must be repaid in full, including interest and fees.

What to consider

There are advantages and disadvantages to all types of home loans so it’s important to consider your own circumstances. 

Features that allow you to make extra repayments, redraw funds, or access an offset account, can also be very useful but may come at a cost, so think about what you really need.

How can AMP help?

For further tips and guidance, speak to your adviser. If you don’t have an adviser call us on 131 267 or use our find an adviser tool.

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Any advice in this page is general in nature and is provided by AMP Life Limited ABN 84 079 300 379 (AMP Life). The advice does not take into account your personal objectives, financial situation or needs. Therefore, before acting on this advice, you should consider the appropriateness of this advice having regard to those matters. AMP Bett3r Account is issued by AMP Bank Limited ABN 15 081 596 009, AFSL 234517. Consider the terms and conditions available on request by calling 13 30 30 or at amp.com.au/bett3r and whether this product is appropriate for you. Fees and charges apply.

Although the information is from sources considered reliable, AMP does not guarantee that it is accurate or complete. You should not rely upon it and should seek qualified advice before making any decision. Except where liability cannot be excluded, AMP does not accept any liability for any resulting loss or damage.