a guide to home loan types and features
Choosing a home loan involves more than simply comparing interest rates. The structure of the loan and the features attached to it can have a significant impact on repayments, flexibility, and the total interest paid over time.
Different loan types suit different financial situations. Some borrowers prefer certainty in their repayments, while others prioritise flexibility and the ability to reduce their loan faster.
Understanding how loan structures and features work can help borrowers compare their options when arranging finance.
In this guide we explain some of the most common home loan types and features borrowers may come across, including:
Variable rate home loans
Fixed rate home loans
Split home loans
Extra repayments
Offset accounts
Redraw
Interest only loans
Loan terms
Construction loans
Home loan packages
Variable Rate Home Loans
A variable rate home loan has an interest rate that can change over time. Lenders may adjust their rates in response to market conditions or changes to official interest rates.
Because the rate can move up or down, the minimum repayment amount may also change during the life of the loan.
Variable loans are the most common home loan type and usually offer the greatest flexibility. Many allow extra repayments, redraw facilities and offset accounts, which can help borrowers reduce interest or access extra funds if needed.
Fixed Rate Home Loans
A fixed rate home loan allows borrowers to lock in their interest rate for a set period, typically between one and five years. During the fixed period the interest rate and minimum repayments remain the same, which can make budgeting easier.
The trade-off for this certainty is that fixed loans generally offer less flexibility. Many lenders limit the amount of additional repayments that can be made during the fixed period, and exiting a fixed loan early may result in break costs.
Some borrowers choose fixed loans when they prefer predictable repayments for a period of time.
Split Home Loans
A split home loan allows borrowers to divide their loan into separate portions, usually combining fixed and variable interest rates.
For example, a borrower might choose to fix part of the loan to lock in repayments while keeping the remaining portion variable to maintain flexibility and access features like offset accounts.
This structure can provide a balance between repayment certainty and flexibility depending on the borrower’s preferences.
Extra Repayments
Many variable home loans allow borrowers to make extra repayments above the minimum required amount. Even relatively small additional contributions can reduce both the total interest paid and the length of the loan.
For example, an $800,000 home loan at 6% over 30 years has minimum repayments of approximately $4,796 per month.
If a borrower contributes an extra $100 per week (around $433 per month) toward the loan, the results can be significant.
With this additional repayment:
the loan term reduces from 30 years to around 24 years and 3 months
the borrower could save approximately $208,000 in interest over the life of the loan
This example shows how consistent additional repayments can reduce the time it takes to repay a loan while also lowering the overall interest paid.
Quick Question: Can extra repayments reduce the length of a home loan?
Yes. As shown in the example above, making extra repayments reduces the loan balance. The more you pay extra the shorter the loan term will be.
Redraw
A redraw facility allows borrowers to access additional repayments they have previously made on their home loan.
For example, if someone has paid extra money into their loan over time, a redraw facility may allow them to withdraw some of those funds if required.
This can be helpful for unexpected expenses or renovations while still allowing borrowers to reduce interest costs when the funds remain in the loan.
Quick Question: What is the difference between redraw and offset?
A redraw facility allows borrowers to withdraw extra repayments already made on the loan. An offset account is a separate transaction account that reduces the interest charged on the loan balance. Both features can help reduce interest but they work in different ways.
Offset Accounts
An offset account is a transaction account linked to a home loan. The balance in the account reduces the portion of the loan that interest is calculated on.
For example, if a borrower has:
a home loan balance of $800,000
$100,000 in an offset account
Interest would only be calculated on $700,000, even though the loan balance remains $800,000.
Using the same loan example of $800,000 at 6% over 30 years, maintaining $100,000 in an offset account could reduce total interest by roughly $115,000 over the life of the loan, assuming the offset balance remained consistent.
Offset accounts are popular because they allow borrowers to keep their savings accessible while still reducing the interest charged on their home loan.
Quick Question: What does an offset account actually do?
An offset account reduces the portion of your loan that interest is calculated on. As in the example above, having funds in an offset account can lower the interest charged.
Interest Only Loans
An interest only loan allows borrowers to pay only the interest portion of their loan for a set period, commonly between one and five years.
During the interest-only period the loan balance does not reduce because repayments are not covering the principal amount. Once this period ends, repayments increase because both principal and interest must then be repaid.
Interest-only loans are sometimes used by property investors or in situations where borrowers want to keep repayments lower for a period of time.
Construction Loans
Construction loans are designed for borrowers building a new property rather than purchasing an established home.
Instead of receiving the full loan amount upfront, the lender releases funds in stages as construction progresses. These are known as progress payments.
Interest is typically charged only on the portion of the loan that has been drawn at each stage of the build. As construction moves forward and more funds are released, the loan balance gradually increases until the project is completed.
Once construction is finished, the loan generally converts to a standard home loan structure.
Loan Terms
Most home loans are structured over a 30-year term, although some lenders may offer longer terms such as 35 years.
A longer loan term can reduce the minimum repayment amount, which may help improve borrowing capacity or make repayments more manageable. However, extending the loan term usually increases the total interest paid over time unless extra repayments are made.
Lenders may also adjust the loan term depending on the borrower’s age. If the standard loan term would extend well past a borrower’s expected retirement age, the lender may reduce the loan term so the loan is scheduled to be repaid sooner. This can increase the required repayments but ensures the loan fits within the lender’s servicing policies.
Home Loan Packages
Many lenders offer packaged home loans that bundle several features together in exchange for an annual fee.
These packages can include benefits such as:
discounted interest rates
access to offset accounts
fee reductions on certain banking products
additional banking features linked to the loan
Offset accounts are commonly available through packaged home loans.
Annual package fees generally range between $199 and $499 per year, depending on the lender.
The interest rate discount applied to a packaged loan is often determined using a lender pricing tool. Several factors can influence the level of discount offered, including:
the loan-to-value ratio (LVR)
the value of the property used as security
the size of the new loan
existing loans with the lender
the total lending amount across all facilities
Because these factors differ between borrowers, the final interest rate and discount offered can vary even when two borrowers are applying with the same lender.
Final thoughts
The interest rate is only one part of choosing a home loan. The structure of the loan and the features attached to it can influence flexibility, repayment options and the total interest paid over time.
Understanding how options such as extra repayments, offset accounts, redraw facilities and different loan structures work can help borrowers choose a loan that suits their circumstances both now and in the future.
If you would like to understand how different home loan options may apply to your situation, you can contact the team at Complete Home Loans below to discuss your borrowing options and compare available lenders.