Types of home loans

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Common Types of Home Loans

In Australia, there are several types of home loans available, each catering to different needs and financial situations. Understanding these options is crucial for potential homeowners or those looking to refinance. Here’s an overview of the most common types of home loans, along with their pros and cons:

Standard Variable Rate Loans

Pros

R

Flexibility: Offers features like extra repayments, redraw facilities, and offset accounts.

R

Rate Variability: Can benefit from rate drops.

Cons

Q

Rate Uncertainty: Monthly repayments can increase if interest rates rise.

Fixed-Rate Loans

Pros

R

Stability: Locks in an interest rate, ensuring consistent repayments.

R

Budgeting Ease: Makes it easier to budget as repayments don’t change.

Cons

Q

Less Flexibility: Often limits extra repayments.

Q

Rate Drop Loss: Won’t benefit if rates fall.

Interest-Only Loans

Pros

R

Lower Repayments Initially: Only interest is paid, reducing initial repayments.

R

Investment Strategy: Suitable for investors looking to minimize holding costs.

Cons

Q

Higher Overall Cost: Total interest paid over the loan term is higher.

Q

Principal Shock: Repayments can rise significantly once the interest-only period ends.

Home Equity Loans

Pros

R

Access to Funds: Allows borrowing against the equity in your home.

R

Versatility: Can be used for renovations, investments, etc.

Cons

Q

Risk of Over-Borrowing: Temptation to borrow more than necessary.

Q

Property Risk: Puts your home at risk if you can’t meet repayments.

Low-Doc Loans

Pros

R

Self-Employed Friendly: Ideal for those with irregular income.

R

Simpler Approval Process: Requires fewer documentation.

Cons

Q

Higher Interest Rates: Typically comes with higher rates.

Q

Larger Deposits: Often requires a bigger down payment.

Offset Accounts

Pros

R

Interest Savings: Reduces the interest payable on your loan.

R

Flexibility: Funds can be added or withdrawn.

Cons

Q

Higher Fees: May come with higher account fees.

Q

Interest Rate: Often higher than basic home loans.

Line of Credit

Pros

R

Flexibility: Access funds up to a certain limit at any time.

R

Only Pay Interest on Used Funds: Interest is only charged on the amount used.

Cons

Q

Higher Interest Rates: Generally higher than standard loans.

Q

Discipline Required: Easy to overspend due to easy access to funds.

Each type of home loan offers different advantages and challenges. The best choice depends on individual circumstances, financial goals, and market conditions. Prospective borrowers should consider their long-term financial stability and consult with financial advisors or mortgage brokers to make informed decisions.

With Smart Advance you have access to competitive home loan offers from over 66 lenders nationwide.

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