Compare some of the best variable rate home loans

There are three main types of home loan rate that you can apply for in Australia – fixed, variable and split. The interest repayments on a fixed rate loan will remain stable throughout an initial fixed term (typically the first one to five years of the loan), while the interest repayments on a variable rate loan could go up or down. The third type, a split loan, is a combination of the first two at a percentage agreed upon by you and your lender.

Variable rate home loans are commonly split into three different types:

Basic variable rate home loan

The most basic of variable rate home loans offers little in the way of features, but in turn, provides a lower interest rate and lower ongoing and application fees.

Introductory discount variable rate home loan

Some lenders offer a discounted interest rate for an initial set period, usually one to three years. After this set introductory period, the rate switches to the revert rate. It’s important to compare this new rate with others on the market to make sure you’re still getting the most out of your home loan. This type of variable rate home loan can also be limited in features, so it’s best to check with each lender to see what they offer.

Standard variable rate home loan

This is the most common variable rate home loan, often providing features such as an offset account, redraw facilities and the ability to make extra repayments. Generally they have higher interest rates compared to basic variable rate loans.

Individual banks and lenders decide whether to put rates up and down, guided to a certain degree by both the Reserve Bank of Australia (RBA) and other market factors. Each month, with the exception of January, the RBA board will meet and set the official interest rate, known as the cash rate.

Lenders are not required to set their rates based on the cash rate, however they will generally follow it closely when choosing to put their rates up and down. If the RBA puts rates up, lenders will typically increase their rates, and if the RBA slashes rates, lenders will generally do the same.

Even when the cash rate is held steady, variable home loan rates can change due to other market factors and decisions by the lender. So, when you compare variable rates you may well find that lenders offer similar rates but not identical ones.

Variable rate home loans tend to come with more features than fixed rate loans, including offset accounts and redraw facilities, the ability to make extra repayments, and in some cases packaged extras like credit cards.

An offset account

An offset account functions in much the same way as a standard bank account, but it’s linked to your home loan. The money that you put into an offset account will allow you to reduce the balance of your home loan for the purposes of calculating the interest payable. It will also be available for you to draw on if you need it – like a regular bank account.

A redraw facility

A redraw facility allows you to access additional repayments you have made on your home loan. It’s different from an offset account in that it doesn’t function like an everyday bank account, and doesn’t come with a debit card attached. So, while the funds are available, they cannot be accessed as readily for everyday transactions.

The ability to make extra repayments

Variable rate home loans typically come with the ability to make additional repayments on top of your standard monthly repayment without any extra charge. Making extra repayments could lower the balance of your mortgage, reducing the amount of interest you pay each month, and potentially help you to pay it off more quickly.

Packaged extras

Depending on the lender, variable rate home loans can come as packages, with extras such as credit cards and everyday bank accounts included. If you’re interested in these extras, a package can mean paying just one fee for them instead of multiple fees. If you sign up for a package your lender may offer you a discount on your variable rate. Before signing up though, it could be worth comparing your options to see if you could find a better deal by taking out these products separately.

Potential advantages of a variable rate include the flexibility to make additional repayments on your loan, the potential for lower repayments if interest rates go down, and an array of other possible features which include: 

• Flexibility: Variable rate loans are generally more flexible than their fixed rate counterparts thanks to the fact that you can generally make additional repayments above what you owe each month. This can bring down the balance of your loan more quickly without having to pay a fee or penalty for doing so.
• Potential for lower repayments: The interest rate on a variable rate home loan can fluctuate depending on your lender’s decisions and those of the RBA. But if your interest rate goes down it means you could end up paying less each month.
• Features: Variable rate home loans may help you streamline your everyday finances thanks to features like offset accounts and redraw facilities, packaged extras like credit cards and transaction accounts.

Potential disadvantages of a variable rate home loan include the potential for higher repayments if interest rates go up and higher fees, which are outlined in more detail here:

• Potential for higher repayments: Just as interest rates can go down, they can also go up. A potential drawback of a variable rate is that even if your repayments were low in the beginning, they could get much higher and stay that way if interest rates go up for prolonged periods.
• Uncertainty: The fact that you do not know for sure whether your interest rate will rise or fall can be a source of uncertainty, and in turn can make it challenging to budget over the long term.
• Higher fees: Variable rate home loans can come with many additional features, but this can make them more expensive than fixed-rate home loans which generally do not have as many bells and whistles. For example, some lenders may charge a regular fee on loans with an offset account, while package fees can be a few hundred dollars a year depending on your lender. You may find though, that the convenience of an offset account and the flexibility to make additional repayments could alleviate some concerns about higher fees.

Lenders are legally required to show both an interest and comparison rate on the home loans they provide. A home loan comparison rate is an estimate of how much a loan could cost each year when interest, as well as most ongoing fees and charges, are added up. This rate may give you a better understanding of your repayments over the lifetime of your loan. Canstar provides both interest and comparison rates in our comparison tables.

You should also consider what features (like offset accounts and redraw facilities) that a lender may offer. If you feel that you might not make use of these features, a basic variable rate home loan may be more suitable. The fees, both from the initial application and ongoing, should also be considered.

If you’re contemplating a variable rate home loan, you can compare variable home loan rates with Canstar to find out which lenders might be able to meet your particular requirements. You can sort the table above to see which lenders on our database currently offer the lowest variable interest rates on their home loans.

You can also take a look at the winners of Canstar’s Home Loan Awards to find out which lenders are offering outstanding value to Australian buyers. Consider the Target Market Determination (TMD), the Key Facts Sheet and other important terms and conditions of a home loan before making a decision to apply for a home loan. Contact the product issuer directly for a copy of these documents.