Variable Rate Home Loans

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    What is a variable rate home loan?

    Home loans are expensive, and there are many ways out there to save some money on your mortgage. One of these is by getting a home loan with a variable rate that rises and falls along with the housing market.

    A variable rate home loan is one where your interest rate fluctuates throughout the loan term. Interest rates get cheaper during boom periods in the economy, and get more expensive when the economy slows. Most variable rates are closely tied to the official cash rate of the Reserve Bank of Australia (RBA).

    How do repayments work with a variable interest rate?

    There are a few key pieces of information required to calculate interest.

    • Principal loan amount: How much money was initially borrowed
    • Loan term: Length of the loan, typically around 25 to 30 years
    • Current interest rate: Percentage taken based on principal amount

    Interest is calculated on a daily basis. This amount is found by multiplying your principal amount by the current interest rate and then dividing by the 365 days in the year. You then multiply that daily interest amount by the number of days in your repayment period, e.g weekly, fortnightly, or monthly. You can use our home loan calculator and plug in specific amounts to see exactly what you’d be paying with any given interest rate.

    How often do variable rates change?

    Lenders can change variable interest rates at any point, though there are limits to the size of the swing. The RBA meets monthly to consider potential changes to the official cash rate, and if a rate change is announced, most lenders will follow suit.

    What are the different types of variable rate home loans?

    Buying a house is already complicated enough without having to think about variable rate mortgages. However, taking a few minutes to understand the different options can greatly pay off. These are the most common types of variable home loans.

    • Basic variable home loans

      These loans have lower interest rates than some other options, but usually come with minimal extra features and limited flexibility.

    • Standard variable home loans

      These loans are the most popular choice for consumers, and come with most of the essential features and decent rates.

    • Introductory discount home loans

      These loans advertise themselves as the lowest variable rate home loan, but after a while they revert to a higher rate.

    • Full feature loan

      These loans come with premium features like offset accounts, free extra repayments, or a free redraw facility, but they do cost more money.

    What are the features of a variable rate home loan?

    One of the main draws of a variable rate home loan is to get more flexibility than what a fixed rate home loan can offer. These are the most popular features of a variable rate loan.

    Offset account This is a transaction account that is linked to your mortgage. The sum in your offset account gets subtracted from your loan balance, and the interest is calculated based on that reduced amount.

    Extra repayments Variable rate loans don’t penalise you for making extra payments on top of what you owe each month. This helps you pay off the loan faster, which saves money on the total interest paid.

    Redraw facility If you are allowed to make extra repayments, then you are also usually allowed to withdraw them back if you need to quickly get ahold of some money. This is a nice way to have emergency funds.

    Package deals Many lenders package home loans with the rest of your finances, like your credit card or a transaction account. The package deal will usually be cheaper than getting everything separately.

    Keep in mind that these premium features come at a premium price, so make sure you only pay for what you think you’ll actually be using.

    How do I know if variable rights are right for me?

    Variable rates may or may not be the best fit for you: it all depends on your financial circumstances. These are some of the main target demographics for variable rate home loans.

    • First home buyers: A variable interest rate allows beginner homeowners to try out different options and see what works for them. After a while, you may decide to switch to a fixed rate if you want a more stable and risk-averse setup.
    • Investors: Property investors are often drawn to variable loans for the prospect of getting the lowest variable rate and maximising their profit. The additional features are also useful for saving money on interest and getting more value.
    • Homeowners looking to refinance: If you’re unhappy with your current rate, refinancing to a variable rate home loan opens doors to major potential savings by keeping your repayments low. You also gain access to various cost-saving loan features.

    How do I find the best variable rate home loans?

    Variable rate home loans include several different pieces, so it can be confusing when you’re searching for the best rate. These are the main factors to look for.

    • Interest and comparison rate: A competitive interest rate is key for saving money, since it makes up the bulk of the loan cost. Also check the comparison rate, which incorporates the different loan fees and is a more precise estimate.

    • Loan-to-Value Ratio: The LVR is the proportion of your loan amount to the overall home value (e.g loaning $80,000 for a $100,000 purchase means an LVR of 80%). Most loans with an LVR over 80% will require Lenders Mortgage Insurance.

    • Loan fees: Variable rate home loans frequently come with fees, especially if you have one with many features. Look for any application fees, recurring account upkeep fees, and exit fees—all of these can come back to bite you later on.

    • Cost-saving features: Variable home loans frequently come with flexible features that give you more control over your payments. If you play your cards right and the market conditions are favourable, you can save a lot of money.

    Variable rate home loan FAQ

    What is the main difference between fixed rate and variable rate loans?
    A fixed rate loan has the interest rate locked in for a defined period of time, typically from one to five years. Once that period is up, the rate will either revert to a standard variable rate, or it can be re-fixed at a new percentage. Meanwhile, variable rates fluctuate with market conditions, so your payments can be lower or higher.
    What is a split rate home loan?
    A split loan gives you the best of both worlds. Part of the loan amount is subject to a fixed interest rate, which provides some stability in the short and medium term. The rest of the loan amount has a variable interest rate, letting you take advantage of any rate cuts while keeping your overall risk at a lower level.
    Should I get a full feature home loan?
    If you foresee your financial circumstances to dynamically evolve in the coming years, you would benefit from the enhanced flexibility and control that a full feature home loan grants. Offset accounts, unlimited extra repayments, and free redraws all give you more decision-making power over where your money goes. However, these features come with an added price, so don’t get a full feature loan if you think you won’t use them.

    Bottom line takeaways for variable rate home loans

    A variable rate mortgage is a classic risk-vs-reward situation. You get to take full advantage of prosperous market conditions, but you feel a heavier brunt during economic slowdowns. You also get to enjoy several custom features and modifications, though these come at a higher price. Now that you know more about this topic, you can locate the best variable rate home loans with ease.