Different types of Property Investor & Owner Occupied home loans

Choosing the right home loan for you

Everything you need to know about different types of home loans

If you’re looking to purchase a home, either for investment or to live in, it’s important to understand the different types of home loans available. In this blog post we’ll discuss what types of home loans there are in Australia so that you can decide which home loan is the right one for you.

Navigating the world of home loans can be daunting. And it’s vital to understand which home loan is best for your circumstances. At Capital Properties, we help Australian Defence Force (ADF) members to invest their disposable income wisely. We understand the unique financial situations of ADF personnel and aim to help you achieve long-term financial freedom through smart property investments.

Our free Capital Properties Discovery Session  is a great place to discover which home loan is the right one for you.

On the go? Here’s 30 seconds of take outs:

• Capital Properties can help you understand which home loan is best for your circumstances.
• There are three main types of home loans: fixed, variable and split-rate loans.
• Variable rate home loans have changeable interest rates that fluctuate with market conditions.
• Fixed rate home loans lock in a fixed interest rate for approx. one to five years.
• Split rate home loans split the loan amount into different rate types, combining variable and fixed rate loan features.
• Home loans generally need to be paid in 2 parts: principal and/or interest. We discuss these in depth below.

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Three types of home loans

In Australia, you’ll usually come across three main types of home loans which vary due to the different ways interest rates are calculated. These are fixed, variable and split-rate loans. The Capital Properties team have collated a list of some of the home loan choices available to you below. If you’re still unsure which home loan is best for your individual circumstance, get in touch with our team and we’ll help you find the best home loan for you.

1. Variable rate home loan

A variable rate home loan has a changeable interest rate that can fluctuate based on market conditions. That means your mortgage repayments could go up or down at any point, and each payment could look different. That obviously requires careful budgeting to make sure payments are met.

Because there is an inherent risk of the loan payments going up as interest rates rise, variable loan rates are usually very competitive. They also often come with features such as the ability to link an offset account or re-draw facility, and often allows the homeowner to make additional repayments.

2. Fixed rate home loan

A fixed rate home loan is a mortgage that locks in your interest rate for a set period, usually between one and five years. This predictability in repayment amounts make budgeting easier and as we’ve seen in recent years can lead to huge savings as interest rates rise. However, it’s also possible that if variable rates fall during the fixed period, you’ll miss out and will have to pay more. Fixed rate home loans are usually less flexible, so often won’t allow extra repayments or there may be limits on the extra amount you can contribute within a set timeframe (e.g. a year). You’re also likely to incur additional fees if you need exit the loan early.

At the end of a fixed term, you can choose another fixed-rate home loan, or move into a variable rate home loan, or a split rate home loan.

3. Split rate home loan

A split rate home loan is sometimes seen as the best of both worlds, offering a mortgage that splits the loan amount into different rate types. A split rate loan combines the features of both the variable and fixed rate loans.

For example, you could split the mortgage in two equal portions, with 50% in a fixed rate loan and the other half in a variable rate loan. The fixed rate provides some stability and protection against interest rate fluctuations, but comes with more flexibility, such as the ability to make additional repayments using the variable-rate portion of the loan.

Repayment options: different ways to repay the loan

There are further options to consider within variable, fixed and split home loans. Most home loans generally need to be paid in 2 parts:

1. Principal: This is the sum of money that was borrowed to purchase the home. Each repayment gradually reduces the outstanding principal balance.
2. Interest: This is the cost of borrowing the money. The interest is calculated as a percentage of the remaining principal. Interest payments start off higher at the beginning of the loan because it’s based on the overall principal balance, but it decreases over time as the principal is paid down.

You can choose whether to pay principal and interest (P&I), or interest only. We’ll look at these options more closely here:

Principal and interest home loan (P&I)

Principal and interest home loans are the most common of all home loans. Each payment made will reduce the overall principal as well as the interest charges. P&I repayments ensure that the loan will be fully repaid by the end of the term (when all the scheduled payments have been made).

Interest-only home loan

With an interest-only home loan, you only pay the interest for a set period of time, typically up to five years. After that, the loan will revert to a principal and interest loan. As you don’t have to pay the principal at the beginning, the repayments are less than P&I loans. This can be great for investors looking to minimise initial outgoings and maximise tax deductions. However, the interest rates for interest-only loans are usually higher than P&I loans, so you could end up paying more across the lifespan of the mortgage.

First home buyer home loan

Most Australian banks and lenders offer a tailored first home buyer mortgage. These often come with additional features like cashbacks and/or Lenders Mortgage Insurance (LMI) discounts with a 20% deposit. The government also offers incentives to first home buyers, such as the ‘First Home Guarantee’. And don’t forget that there are plenty of ADF benefits for first-home buyers. We’ve covered these in our blog post “Know your alphabet (of first home buyer entitlements).”

The ’Defence Force first home buyers guide’ is an excellent read if you’re looking for your first home loan.

Investment home loan

An investment home loan is a loan that’s taken out to fund the purchase of an investment property, and not for the borrower to live in as a principal place of residence.

Due to potential volatility in the rental market and the possibility of vacancies, investment home loans tend to be considered more high-risk than owner-occupied loans. Therefore, investment home loans will often have higher interest rates and stricter conditions than owner-occupied home loans.

Bridging loan

A bridging loan is a short-term loan, usually up to 12 months, that’s intended to cover the purchase price of another home while you’re still in the process of selling your existing property. Bridging loans are calculated against the equity of your current property and are usually interest-only home loans.

Construction home loan

A construction home loan is a loan taken out to allow for major renovations or if you’re building a new home. This loan allows home buyers to allocate the funds (called a “progressive drawdown”) during each stage of a construction process rather than receiving all the loan at the start. Therefore, the interest only needs to be paid on the amount that’s drawn down, rather than the whole loan amount until the work is complete.

Understanding the different types of home loans is crucial for making smart property investments. Before you decide which home loan is best for you, you’ll need to be sure of your financial situation and whether the loan will help you achieve your long-term financial goals.

At Capital Properties our network partners are here to guide ADF members through this process, ensuring your disposable income works hard to secure your financial future. Talk to us today to learn more about how we can help you secure the best home loan for your circumstances.

*Special Note* This article was written in conjunction with our qualified Mortgage Broker Network Partner