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 at any time, meaning you could end up paying more or less from one fortnight, 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 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.

In May of 2022, the RBA raised the cash rate for the first time in more than eighteen months, after setting it at a record-low level in response to the economic pressures of the COVID-19 pandemic. The RBA then followed this up with a cash rate hike of 50 basis points in June 2022 – the largest increase in 22 years.

On both occasions when the RBA raised the cash rate, many banks and other lenders followed suit by raising their own variable rates, and further rate rises are anticipated throughout 2022. Prospective homebuyers and refinancers should be aware that variable rates are expected to rise throughout the rest of the year.

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 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 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 for the purposes of calculating 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. If you’re interested in all these things, a package can mean paying just one fee for them instead of multiple fees, and 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.

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

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 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, in many cases without having to pay a fee or penalty for doing so.
• 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 in some cases.

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 over the long term 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. 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.

Which lenders have the lowest variable rate home loans?

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, considering the price and features of their home loan products.

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 it. Contact the product issuer directly for a copy of these documents.

What is a variable rate home loan?

A variable rate home loan is one where the interest rate you pay is changeable, and can go up or down depending on the decisions of your lender and the movements of the RBA cash rate. 

What are the advantages of a variable rate home loan?

Possible advantages of a variable rate home loan include the availability of such packaged extras as offset accounts and redraw facilities, the flexibility to pay off your home loan more quickly, and the potential for lower repayments if interest rates go down.

What are the disadvantages of a variable rate home loan?

Possible disadvantages of a variable rate home loan include the fact that those with packaged extras may come with more fees and charges attached, and the fact that they are prone to uncertainty because your lender can choose to raise your rate at any time, making your repayments higher.