What is a home loan?
A home loan refers to a sum of money loaned by a bank or lender to a borrower, helping them fund the purchase of a home.
Both parties will agree on the time in which the loan needs to be paid back ‒ typically, between 25 and 30 years. They will also agree on a repayment schedule – weekly, fortnightly, or monthly.
Borrowers are generally required to pay interest on the outstanding debt (called the principal) at a particular rate.
A home loan normally uses the property being bought as security. If a borrower falls behind in their repayments, the lender may repossess their home or force them to sell it to pay off their debt.
What is the difference between a home loan and a mortgage?
The term ‘home loan’ refers to the money someone borrows to purchase a property.
A ‘mortgage’ is an agreement between a borrower and a lender, in which a property is used as security for a loan. It gives the bank the right to sell your property to get its money back if you default on your home loan repayments.
What types of home loans are available in Australia?
In Australia, home loans are generally differentiated by how interest is charged and the loan’s purpose.
What interest rate options are available on home loans?
The two types of interest rate are fixed and variable. Each offers different benefits and drawbacks, and borrowers can generally choose to ‘split the difference’ and realise one on part of their loan and the other on the rest.
What is a fixed-rate home loan?
A fixed-rate loan sets or ‘fixes’ the interest rate you’re charged for an amount of time, commonly between one and five years. Over this fixed period, your repayments will remain the same, regardless of whether interest rates rise or fall more broadly.
This can offer certainty, but there’s a catch: fixed-rate loans often come with fewer features than variable rate loans, and generally restrict your ability to make extra repayments.
Similarly, if you sell your property or refinance your loan before your fixed term is up, your lender may charge you a break fee.
What is a variable rate home loan?
A variable rate can rise and fall over time, often depending on the cash rate.
Variable rate home loans may come with more features and greater flexibility than fixed-rate options, including:
- Redraw facilities
- Offset accounts
- The ability to make unlimited extra repayments, generally without penalty
- The ability to refinance or pay off the loan at any stage, though certain fees can apply
The key disadvantage of a variable rate is that the minimum repayment can rise and fall. If you hate rate surprises, this may have the potential to grate on your nerves.
On the plus side, if the RBA lowers the cash rate, your lender could follow suit and drop your loan’s interest rate, thereby lowering your repayments, putting dollars back into your wallet.
What is a split rate home loan?
A split rate effectively divides your home loan into two separate loans, one with a fixed rate and one with a variable rate.
A split rate could allow you to enjoy ‘the best of both worlds’, combining the flexibility and features of a variable rate with the certainty of a fixed rate.
If you have a split rate loan, the repayments on the fixed portion will remain the same throughout the fixed period, while repayments on the variable portion could go up or down. Should you choose to split your loan, you will generally be able to choose the percentage split between fixed and variable.
What is an interest-only home loan?
With an interest-only home loan, the borrower doesn’t have to pay down the principal balance of the loan. Instead, only the interest that accrues on that principal is payable. In general, a borrower will only be able to make interest-only repayments for a short term, commonly between one and five years, before they revert to standard principal and interest repayments.
This type of loan can be useful for:
- Investors who wish to claim the interest as a tax deduction
- Buyers who intend to hold onto the property for a few years before selling it
- Homeowners who want some financial breathing room
Note that an interest-only loan may not suit buyers wanting to live in a house for the long term. That’s because interest generally accrues daily on every dollar outstanding. If you don’t chip away at the principal to reduce how much debt you’re being charged interest on, you’ll probably have to pay more interest over your loan term than if you made principal and interest repayments.
Home loans available for different purposes
There are a variety of reasons you might take out a home loan. It might be that you’re taking your first steps on the property ladder, or you may be an existing homeowner seeking to buy an investment property. No matter your intent, there’s probably a home loan for you.
What is a first home buyer home loan?
There’s no such thing as a dedicated ‘first home buyer loan’, but home loan providers often offer special deals and discounts to attract first home buyers.
These can range from:
- Cashback offers
- Rebates on conveyancing costs
- Establishment, ongoing, or annual fee waivers
First home buyers may also be eligible for schemes such as the 5% Deposit Scheme or the First Home Super Saver Scheme (FHSS Scheme).
What is a line of credit home loan?
Think of a line of credit like a giant credit card secured against your home equity. You can borrow money up to a pre-approved limit without having to reapply. You can draw from the line of credit and repay the money any time you wish, and you will typically only pay interest on how much you have drawn.
What is a bridging home loan?
A bridging loan is a special short-term loan to ‘bridge the gap’ for people buying one home while selling another. A bridging loan can help you cover the purchase of the new property as you arrange the sale of your existing one.
What is a construction home loan?
A construction loan can be used to fund the construction of a new home or a major renovation. They allow for what’s called a progressive draw down and usually only charge interest repayments during the build phase, before reverting to a standard principal and interest loan once construction is complete.
What is an owner-occupier home loan?
An owner-occupier home loan is for borrowers wanting to live in a home, with no plans to rent it out or treat it as an investment property.
What is an investment home loan?
An investment loan is a home loan for borrowers purchasing an investment property.
Investment loans often require a lower loan-to-value ratio, meaning you may need a larger deposit than you would for a standard home loan. They also tend to have a higher interest rate than standard home loans.
What is a refinancing home loan?
Like a first home buyer loan, there’s no such thing as a pure refinancing home loan. However, some banks and lenders might offer incentives like cashback deals, rate discounts, or fee waivers to borrowers switching their mortgage.
What is a reverse mortgage?
A reverse mortgage is a type of loan that allows you to convert a portion of the equity in your home into cash. They’re generally only available to borrowers aged 60 and over.
The borrowed funds are generally available as a lump sum or in smaller recurring payments.
With a reverse mortgage, you retain ownership of your home, and you can generally make repayments in part or in full at any time without incurring a penalty. However, interest will be added to the outstanding balance, where it can compound, eroding your equity over time.
