Home loan types, and who each one tends to suit

The short answer

A fixed rate holds still for an agreed term. A variable rate moves with the market and generally carries more features. A split loan puts part of the balance in each.

Beyond the rate, the differences are about access: whether you get an offset account, whether you can redraw, and whether you are repaying the balance or only the interest on it.

Fixed, variable, or a bit of both

This is the first fork, and the one people agonise over most. It is worth being clear that neither answer is safer in general. They are safe against different things.

Fixing suits people whose circumstances are likely to stay put, and whose plans do not include selling or restructuring during the term. If there is any real chance of a move, a fixed loan is the wrong place to be, because the break cost is the price of changing your mind.

Not all variable loans are the same

Lenders usually run more than one variable product, and the difference between them is features rather than philosophy. A basic variable strips the extras out and prices accordingly.

• A standard variable loan generally carries offset, redraw and a package of features, often with an annual fee
• A basic variable loan carries fewer features and usually a lower rate, with no package fee
• An introductory rate is discounted for an initial period and then reverts to an ongoing rate

The trap in a basic variable is deciding you want an offset account two years later. The trap in a standard variable is paying an annual package fee for features you never use.

On a modest loan, an annual fee can outweigh a small rate difference. That is arithmetic rather than opinion, and it is worth doing before you choose.

Offset and redraw, which are not the same thing

Both reduce the interest you pay by using money you already have. They differ in where that money legally sits, and that difference matters more than it sounds.

For an owner-occupier with a decent everyday balance, an offset account usually earns its keep. For somebody who runs their account close to zero, it is a feature you are paying for and not using.

There can be tax consequences to the choice where the property is or may become an investment. That is a question for your accountant, and it is worth asking before you structure the loan rather than after.

Interest only, and why lenders treat it carefully

On an interest only loan you pay the interest and none of the balance for an agreed period. The repayment is lower during that period and higher afterwards, because the same balance now has fewer years to be repaid over.

It is used most often by investors, for reasons that are partly about cash flow and partly about tax treatment. Owner-occupiers can access it, but lenders apply tighter policy and usually price it higher.

Line of credit, and introductory rates

A line of credit works like a large secured overdraft against your property. You draw what you need up to a limit, and interest is charged on what is drawn.

It suits people with a specific and disciplined use for it, such as funding a renovation or holding a deposit ready. It suits nobody who intends to treat it as available money, because that is exactly what it looks like.

An introductory rate discounts the first period of the loan and then reverts. The question to ask is what it reverts to, and whether that ongoing rate would still be competitive if you did nothing about it.

Features are never free

Every feature on a home loan is paid for somewhere, through the rate, an annual package fee or a tighter policy. That is not a criticism of lenders, it is just how the pricing works.

• Ask what the comparison rate is, because it folds in fees the headline rate leaves out
• Ask what the annual or ongoing package fee buys you, and whether you would use it
• Ask what happens if you want to fix part of the loan later, or repay it early
• Ask whether the offset is a full offset, and whether it is available on this product
• Ask what the rate reverts to at the end of any fixed or introductory period

The right structure is the one that fits how you actually use money, not the one with the longest feature list. A loan you never use the features on is an expensive loan with a good brochure.

Where to go next on this site

Each type has a page of its own, with the detail this guide summarises. Start with the two or three that sound like your situation.

Some loans are defined by who is borrowing rather than by how the rate behaves. Those sit on their own pages too.