What are the different types of mortgage loans?

Interest rates

When it comes to choosing the right home loan, it often comes down to how you’d like the interest rate calculated. You usually have three options for your home loan interest rate: variable home loans, fixed-rate mortgages, and split-rate loans. Here’s how these different rate types compare. 

Variable home loan rates

As the name suggests, variable-rate home loans tend to fluctuate over time, typically in response to the official cash rate set by the Reserve Bank of Australia (RBA) and other market conditions. You can read more about how RBA changes affect you and your mortgage here.

As the interest rate changes on your home loan, so do your mortgage repayments. So, if interest rates increase, you’ll end up paying more for your mortgage. On the other hand, if rates go down, you can take advantage of the lower interest repayments. While variable home loans tend to come with a level of uncertainty, they often offer greater flexibility than fixed-rate home loans. Depending on your variable loan, you might be able to make extra repayments, redraw funds if needed and offset* your mortgage with any spare cash or savings you have. Each of these features can help you to pay off your home loan quicker so you can potentially save on interest repayments over the life of your loan.  

Fixed-rate home loans

Unlike variable home loans, a fixed-rate loan allows you to lock into a fixed interest rate for a specific period of time. Most lenders offer fixed-rate loan periods of 1 to 5 years. 

Essentially, with a fixed-rate home loan, your interest rate stays the same for the duration of your fixed term, regardless of any changes in the official cash rate set by the RBA or other market conditions. This means that you can count on your mortgage repayments to stay the same for the fixed-rate period, which can provide greater stability when it comes to budgeting. That said, fixed-rate home loans don’t tend to offer the same level of features, facilities and flexibility as variable home loans.

Please note, Unloan does not offer fixed-rate home loans.

Split-rate home loans

If you’re tossing up between a variable and fixed-rate home loan, you might want to consider a split-rate mortgage instead. With a split-rate loan, you get the best of both worlds. You can enjoy the predictability and stability that comes with having a fixed-rate loan while taking advantage of the flexibility, features and facilities that a variable rate offers.

With a split-rate home loan, you essentially divide your loan into two portions: one with a fixed interest rate and the other with a variable interest rate. As for the specific split, you can tailor the portions to suit your preferences. For instance, some borrowers choose to do a 50/50 split, whereas others prefer to fix a larger portion of their mortgage with a 70/30 split. Ultimately, the way you split your loan is up to you and the lender’s offerings.  

Please note, Unloan only offers variable-rate loans.

Repayment types

While the interest rate is a big factor when it comes to deciding what type of home loan works best for you, you might also want to have a think about how you’d like to repay your mortgage.

Principal and interest home loan

With a principal and interest home loan, your mortgage repayments are essentially divided into two components: a portion that’s repaid towards your outstanding loan balance (the principal) and a portion that covers the interest charged by your lender. 

As you repay your loan, you’re slowly able to chip away at the principal of your loan, which in turn helps you to build equity in your home. This can allow you to boost your borrowing power in the future. So long as you keep on top of your loan repayments, by the end of the loan term, you’ll own your property outright.

At Unloan, we only offer principal and interest home loans.

Interest-only home loan

Alternatively, some borrowers choose to opt for an interest-only home loan. With an interest-only loan, your mortgage repayments only cover the interest portion of your home loan. While repayments on interest-only loans are typically lower than principal and interest mortgages, you’re not actually paying down the outstanding loan balance.

Interest-only loans tend to have an initial period, typically between one and five years, during which you only make interest payments. Once this period wraps up, your loan will generally revert to a principal and interest mortgage, where you’ll start repaying both the principal and interest.

With so many different types of home loan products out there, it’s essential to do your research to find the mortgage that works best for you. While the interest rate and repayment type should be factored in, it can also be worth exploring specific loans that have been designed to cater to different loan purposes. You can read up about these types of mortgages here.

In the meantime, check out what we have on offer at Unloan. Whether you’re looking to refinance or buy a home, we’ve got a couple of great loan products that are currently on offer or soon to be released to suit your needs. Explore our loan features today.

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*Please note we currently do not offer offset accounts at Unloan

This article is intended to provide general information only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. Please consider seeking financial advice before making any decision based on this information.‍

Unloan is a division of Commonwealth Bank of Australia.

Applications are subject to credit approval, satisfactory security and you must have a minimum 20% equity in the property. Minimum loan amount $10,000, maximum loan amount $10,000,000, and total borrowings per customer across all Unloan loans is $10,000,000. (For purchase loans a minimum 10% equity is required - however a Lenders Mortgage Insurance (LMI) premium and higher interest rate apply. In some cases, depending on the property’s location or type, an LMI premium may also be required for LVR between 70.01% to 80%). For loans with Lenders Mortgage Insurance (LMI) the minimum loan amount is $10,000, maximum loan amount is $3,000,000 and total borrowings per customer across all Unloan loans is limited to $3,000,000).

Unloan offers a 0.01% per annum discount on the Unloan Live-In rate or Unloan Invest rate upon settlement. On each anniversary of your loan’s settlement date (or the day prior to the anniversary of your loan’s settlement date if your loan settled on 29th February and it is a leap year) the margin discount will increase by a further 0.01% per annum up to a maximum discount of 0.30% per annum. Unloan may withdraw this discount at any time. The discount is applied for each loan you have with Unloan.

*At Unloan, we do not charge any annual, application, banking, account, transaction, late or exit fees. In certain circumstances you may be required to pay a Lenders Mortgage Insurance (LMI) premium. Learn more about why this is applied and how it works. Government fees may also apply. Learn more about government fees here. Your current lender may charge an exit fee when refinancing.