Variable rate home loans

After many nights spent browsing property listings on the couch and many more Saturdays spent driving between open homes, you think you’ve finally found the one – the house you’re ready to offer on. It’s an exciting moment, but along with the purchase of the property, there is a lot more to think about, including how you will structure your home loan repayments. A variable rate home loan is one potential option, but what does that mean, and what are the possible advantages and drawbacks?

In general terms, 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 the term 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. If you are contemplating a variable rate home loan, there are some important thighs to know.

What is a variable rate home loan?

A variable rate home loan is one in which the interest rate is changeable, and can fluctuate, depending on market conditions and the decisions of the lender. This means that if you take out a variable rate home loan, your interest repayments could go up or down, meaning you could end up paying more or less from one month or quarter to the next.

Who decides when a variable interest rate goes up and down?

Individual banks and lenders decide whether to put rates up and down, somewhat guided by the decisions of the Reserve Bank of Australia (RBA), along with 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 this, 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. Variable rates can change even when the cash rate is held steady due to other market factors and decisions by the lender.

What features does a variable rate home loan have?

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 packaged extras like credit cards.

An offset account

An offset account functions in much the same way as a standard bank account, but it is 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 and therefore the interest payable, but it will 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 is different from an offset 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 could 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. A package can mean paying just one fee for all these things instead of multiple fees, and if you sign up for a package, your lender may offer you a discount on your variable rate.

What are the possible advantages of a variable rate home loan?

Potential advantages of a variable rate include flexibility to make additional repayments on your loan, potential for lower repayments if interest rates go down, and an array of other potential features that may vary based on the particular loan you apply for. In more detail, these advantages 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, and bring down the balance of your loan more quickly.
  • Potential for lower repayments: Your interest rate on a variable rate loan can fluctuate depending on your lender’s decisions and those of the RBA, but if your interest rate goes down, that 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, as well as packaged extras such as credit cards and transaction accounts.

What are the possible disadvantages of a variable rate home loan?

Potential disadvantages of a variable rate home loan include the potential for higher repayments if interest rates go up, and the lack of certainty that comes along with that, as well as the fact that variable rate loans can have higher fees. In more detail, these disadvantages are:

  • Potential for higher repayments: Just as interest rates can go down, they can also go up, and 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 if you don’t know exactly what your repayments will be each month.
  • 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. 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.

Which lenders have the lowest variable rate home loans?

If you’re contemplating a variable rate home loan, you can compare home loans with Canstar to find out which lenders might be able to meet your particular requirements. 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, considering the price and features of their home loan products.

Consider the Target Market Determination (TMD) before making a purchase decision. Contact the product issuer directly for a copy of the TMD.

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This content was reviewed by Finance and Lifestyle Editor Shay Waraker and Sub Editor Jacqueline Belesky as part of our fact-checking process.

Alasdair has more than 15 years of experience as a journalist, and he specialises in property and lifestyle topics for Canstar. He has a Bachelor of Laws (Honours) from the University of Queensland and has lectured at QUT. His work has appeared in outlets including Pedestrian.TV, the ABC and Junkee.

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