Types of home loans

Variable rate loans, fixed rate loans, principal and interest loans, and interest only loans – there's quite a few choices when it comes to home loans. But which one’s right for you?

Let's walk you through the different home loan types and their repayment options. Find out how they might work for you and your financial situation, and what you need to consider.

4 minute read

Variable rate home loans

With a variable rate loan, the rate can go up and down with the current interest rates. This means your repayments can go up and down too.

Benefits of our variable rate home loans:

  • Freedom to make unlimited extra repayments to help pay your loan down faster
  • Flexibility to redraw your extra repayments any time through online banking or over the counter
  • Accounts with 100% offset available with our variable rate home loans, which can help you save on home loan interest
  • If you're making principal and interest repayments, you can set up weekly, fortnightly or monthly repayments to suit your pay cycle
  • You can choose to make interest only repayments for a set period of time
  • Can be used as a construction loan if you’re building your home.

Things to consider:

  • Your loan repayments could increase if your interest rate increases
  • Variations in your repayments make it harder to budget.

Fixed rate home loans

If you’re worried about the impact of fluctuating interest rates on your ability to pay your loan, a fixed rate loan may better suit your needs. Your repayments are locked in, based on an interest rate that’s fixed for an agreed term (one to five years).

Essentially, you’re opting for certainty over flexibility with a fixed rate loan – with peace of mind knowing exactly what your repayments will be.

Benefits of our fixed rate home loans:

  • Your repayments are protected against future rate changes for a fixed period
  • Fixed repayments make it easier to budget
  • Accounts with 40% offset available with our fixed rate home loans, which can help you save on home loan interest
  • You can make extra repayments of up to $10,000 each year to help reduce your loan term
  • You can opt to pay interest only for a period of time
  • If you're making principal and interest repayments, you can set up weekly, fortnightly or monthly repayments to suit your pay cycle.

Things to consider:

  • You won’t benefit from lower repayments if rates fall
  • Break fees may apply if you decide to break the loan during the fixed period
  • Redraw is not available while an account is on a Fixed Rate. Once the Fixed Rate term ends, you can request to access these funds
  • At the end of the fixed rate period, you may be able to fix a new rate for a further period, or your home loan will revert to a variable rate as per your home loan contract.

Splitting your loan between variable and fixed

This means having the certainty of a fixed rate on the fixed rate part of your loan, plus flexibility on the variable rate part of your loan.

Our Home Lending Specialists can help you decide if splitting your loan is right for you.

Paying principal and interest vs interest only

If you make principal and interest repayments, you’ll pay down both the loan amount (the principal) and the interest. Otherwise, you can request to repay the interest only for a set period – usually one to five years. No matter which repayment option applies to your loan, the length of the loan remains the same.

Why make principal and interest repayments?

This means making repayments on both the loan amount (the principal) and the interest. While your initial repayments are higher than interest only repayments, the main benefits include:

  • Lower interest rates than an interest only home loan
  • Lower average repayments over the life of the loan
  • You’re paying down the principal and building up your equity from day one.

Why make interest only repayments?

  • Making smaller repayments can free up your cash flow so you can redirect your money to other investments, or pay for short term expenses like parental leave or education costs
  • There are potential tax and gearing benefits if you use interest only repayments as part of your investment property strategy.

Things to consider about interest only repayments:

  • The principal amount of the loan (the amount you borrowed) won't reduce during the interest only period, so you only start paying it off when your interest only term is up
  • You’ll end up paying more interest over the loan term. This is because you’ll be charged interest on the full loan amount (principal) for longer, as it hasn’t been paid off
  • When the interest only period ends, your repayments will be higher because you’ll have a shorter term remaining to pay off the full loan amount
  • Higher interest rates may apply.

For these reasons, we recommend chatting to your financial advisor before you decide on interest only repayments.

Home loans for different purposes

Investment home loans

Second home, third home or even more homes? If you're buying an investment property, you'll need an investment home loan that's suited to your needs. Keep in mind that different interest rates will usually apply.

Construction loans

If you're building a home, you'll need to take out a construction loan to make progress payments during different stages of the build.

Renovations or other big home expenses

Once you have a home loan, you can redraw any extra home loan repayments down the track for things like renovations (non-structural), investments or expenses you didn’t see coming.

About this article

We take care of all the BS (bank stuff) so you can access the knowledge you need to make informed decisions. When we write a guide or article, we take steps to make sure the information is relevant, accurate and most of all, helpful.

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Check out everything you need to know about the home loan application process.

Let's get into the numbers and the planning behind getting a deposit together.

Need help choosing a loan?

Get in touch with a Home Lending Specialist, and they'll respond within one business day. You can talk on the phone, meet at a branch, or have a Mobile Lending Manager come to you.

Lending and eligibility criteria, and fees and charges, apply for our home loans. The Complete Home Loan Package consists of an eligible home loan, one optional eligible credit card per customer and up to nine optional Offset Transaction Accounts per loan.

The information contained in this article is of a general nature and is not intended to be nor should it be considered as professional advice. You should not act on the basis of anything contained in this article without first obtaining specific professional advice. Also to the extent permitted by law, Bankwest, a division of Commonwealth Bank of Australia ABN 48 123 123 124 AFSL / Australian credit licence 234945, its related bodies corporate, employees and contractors accept no liability or responsibility to any persons for any loss which may be incurred or suffered as a result of acting on or refraining from acting as a result of anything contained in this article.