Variable Rate Home Loans

Did you know that variable rate home loans are one of the most popular types of mortgages across Australia? They are also one of the most misunderstood. Choosing a variable rate home loan can be a good decision, but it can also cause a lot of budgeting issues if you don’t know what you’re doing.

Always review your home loan options with a qualified mortgage broker before refinancing your mortgage or starting a new mortgage. This way you can ensure that you have access to the correct and most current information available.

 

What is a Variable Rate Home Loan?

 

This type of home loan has an interest rate that fluctuates up and down over time, as and when your lender decides. In comparison to a fixed home loan, where the rate is locked in for a period of time, the interest rate on a variable mortgage will move up and down in alignment with market conditions.

These conditions are largely based on economic factors such as what it costs to release funds, what the Reserve Bank of Australia’s cash rate decisions are each month, plus much more.

What this means is that over the course of a year, the rate on your home loan (and your mortgage repayments) might go up and down. Variable rate home loans, sometimes called floating rate loans as well, provide a number of benefits to a borrower, depending on their requirements.

 

Variable Rate Home Loan Pros & Cons

 

There are advantages and disadvantages associated with any home loan, but there are some specifics that you should be aware of when it comes to a variable home loan.

Pros:

  • Plenty of features, such as the ability to make as many additional repayments as you want, implementing an offset account and a redraw facility. The first two options can help you pay your interest and principal off sooner.
  • It’s easy to refinance if you have a variable rate loan. This is because you are not locked in and you can move to another lender to get a better deal. In comparison, a fixed rate home loan often has a high discharge fee if you want to exit the loan prior to the fixed period finishing.
  • Make the most of falling interest rates. If your mortgage is on a variable rate, you get the immediate benefit of any falling interest rates, as these are generally passed on to variable rate borrowers.

Cons:

  • The biggest is obvious. If interest rates rise, so do your interest and mortgage repayments. This could damage your ability to continue to service your mortgage and cause issues in your finances.
  • It can make budgeting fairly difficult if your interest rate fluctuates regularly.

 

What Types of Variable Rate Home Loans Are Available?

 

There are many options variable when it comes to choosing a variable mortgage type. You can see what some of these options are below:

  • Basic home loan. This just covers the basics, no redraw, offset or extra repayment options with this type of loan. You will often get access to lower interest rates and fees if you choose this option.
  • Package home loan. You will get access to discounted interest rates, fees and special accounts if you choose to move all of your banking needs to your variable home loan lender.
  • Full feature home loan. This is the ‘fully loaded’ home loan, with everything from offset accounts, redraw facilities and extra repayment options available. Interest rates and fees are slightly higher but the benefits outweigh the costs.
  • Introductory rate home loan. This type of variable rate home loan is offered at a special discounted rate. This rate is usually only available for the first year and is often offered to first home buyers or borrowers who need to reduce interest costs during the first year of the loan.

The best way to decide what type of variable mortgage option is best for you is to compare the options.

 

Compare Variable Rate Home Loans

 

Deciding on The Right Home Loan For You

 

It can be difficult to decide what type of home loan is right for you, which is why it’s important that you understand what your financial goals and commitments are going to be for the next 3-5 years.

From there, it helps to understand what happens (to your home loan) if you only make interest-only repayments or make principal and interest repayments.

You’ll also want to understand how repayment frequency impacts the interest charged on the principal loan amount.

One of the fastest ways to figure this out is to look at a home loan repayment calculator and run some figures.

 

Let’s look at a variable rate example:

 

Let’s say you’ve got a $300,000 mortgage, with a loan term of 30 years. You want to know how much interest you’d pay if you made weekly vs. monthly repayments as well as variable vs. fixed rate.

Using our mortgage calculator, we’ve used a variable rate of 3.99%. Keep in mind that this can go up and down during the life of the home loan. Monthly repayments are $1430.52 with a total interest payable of $214,986.08.

Weekly repayments would be $329.90 and total interest payable is $214,645.28. That’s a savings of $322.80 over the 30 years, not a lot of difference, right?

With a fixed interest rate for 3 years at 4.29%, for 3 years, we’ll be paying the exact same amount each month. The monthly repayments during the 3-year period would be $1482.85. Total interest payable is $218,170.54.

Weekly repayments during the 3-year period would be $341.97 and total interest payable is $217,829.48.

In this scenario, the cost of the fixed rate mortgage is $3,184 more than with a variable rate home loan

I looks like you’d want to stick with a variable mortgage to take advantage of lower repayments and interest, but you’d need to monitor this on a regular basis to ensure that things don’t change too much to a point where you can no longer afford it. The general rule of thumb, is if interest rates are on the way up , then consider fixing. If they are going down, then stay on a variable rate.

Using the mortage repayment calculator is a great way to figure out whether a variable rate home loan is the best option for you and your family.

Now that you understand what a variable rate home loan is, how they work and what types of mortgages available, you can make an informed decision about your next steps. Let the team at Australian Credit and Finance help you find the best variable rate loan today.

Talk to our friendly team of Australian Credit and Finance mortgage experts who can help you navigate your way through the process of buying a home, investing in property or refinancing your home loan. Call us today on 1300 735 557 to discuss your home loan options.
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