What is a variable rate home loan?
A variable rate home loan is a home loan where your interest rate will change with the market. This means your interest rate can rise or fall over the term of your loan. These home loans usually come with features that allow you to pay off your loan sooner like extra repayments or offset accounts.
Why should you get a variable interest rate?
In Australia, most home loan borrowers have a variable interest rate on their mortgage as opposed to a fixed-rate. Variable interest rates can move up or down at any time, but they generally move in sync with Australia’s cash rate, which is controlled by the Reserve Bank (RBA). For example, when the cash rate is cut, there’s a good chance your lender will also cut the interest rates on its variable home loans, which could include the interest rate you’re paying. Conversely, your interest rate can rise if a lender decides to increase rates, so variable rates can be a blessing and a curse.
Variable-rate loans might be preferable to fixed-rate loans if you think interest rates are going to fall. But when lenders expect a future cash rate cut, some may offer some tantalisingly-low fixed rates to tempt more people into fixing their home loan rate. If you were to go with a fixed-rate, you’ll miss out on any rate cuts over your fixed-term. Remember that lenders normally have a good idea of which way interest rates are moving, and price their home loans accordingly.
Variable loans also tend to be more flexible than fixed-rate home loans, with many offering appealing features like offset accounts, redraw facilities and the ability to make extra repayments. Such features can help you to save on interest and pay off your loan earlier.
Check out our page on current interest rates to see what the RBA cash rate is when you're reading this, as this can give you a good idea of whether rates are likely to be increased or decreased any time soon.
What features do a variable-rate home loan have?
Variable-rate home loans offer many attractive features to borrowers which can often be too appealing to miss out on as they typically allow you to repay your home loan faster and lower your ongoing repayments.
When comparing variable-rate home loans, there are a number of features you can look out for aside from the advertised interest rate. These include:
This feature is exactly what it sounds like - the ability to make unlimited additional repayments on top of your regular minimum monthly repayments, without being penalised. This can include lump sum payments.
If you ever find yourself in the event of an emergency or need access to extra cash, a redraw facility allows you to access additional repayments that you’ve made towards your home loan. For instance, if your mortgage repayments were $5,000 and you made extra $1,000 payments for 12 months, you would have $12,000 available for withdrawal from your redraw facility. These funds are available to use for whatever you wish whether that be a holiday, renovation, etc.
Some variable-rate loan products offer mortgage offset accounts which is a transaction account linked to your home loan. It essentially allows borrowers to reduce the overall amount of interest they pay on their loan balance which could save both time and money in the long run. For example, if John had a loan of $400,000 and had $50,000 in an offset account, he would only have to pay interest on $350,000.
Top-up features: A home loan top up is a way of increasing your loan amount so you can borrow extra money for something else such as a car. In other words, if you have built equity in your home, your lender may lend you extra money.
Pros & cons of variable-rate home loans
A variable-rate home loan is a popular choice for many borrowers in Australia largely due to the flexibility and freedom of options they offer. Not only does a variable-rate home loan allow you to make extra repayments on top of your scheduled instalments - with no penalty fees we might add - it can also save you money over the course of your mortgage. By making additional repayments on a regular basis, you may be able to reduce the length of your mortgage which in turn, reduces the overall amount of interest you’ll pay across the loan term. Additionally, a cash rate drop or interest rate decrease could save you the amount of interest you’re charged each month. For instance, if the RBA announces a cash rate drop and your lender decides to pass the change onto its customers, you’ll have less interest to pay off. But remember, the market can swing both ways so it’s best to be prepared for both scenarios - a decrease and increase.
Variable-rate home loans also offer appealing features such as redraw and offset facilities, which borrowers tend to take advantage of in order to cut down the length of their home loan. If you’re considering refinancing your home loan, it may be easier switching to a different lender or product when you’re on a variable rate as you’ll avoid paying break fees that are often associated with fixed-rate loans.
If there is one drawback of variable-rate home loans it would be the level of financial uncertainty associated with them.
Because variable-rate home loans generally move in sync with Australia’s cash rate, the amount of interest you are required to pay is at the hands of the market and the economy. If the cash rate increases, your lender could put interest rates up which means you’ll pay more on your mortgage. This could make it challenging trying to set and stick to budgets when rate rises can happen unexpectedly.
Tips for finding the lowest variable rate
When the time comes, there a number of things you want to look out for when choosing a variable-rate home loan.
One thing to keep in mind is that there are plenty of options out there, so don’t pick the first you see. With multiple options at your fingertips, it means you can be selective and don’t necessarily have to stick to what the big four banks have to offer. With an online bank or lender, you’ll often find much more competitive interest rates as they don’t have all the overhead costs that come with having a physical branch.
You also want to make sure the lender you choose offers the features you’re after. While having a low interest rate is worth it, you also want to benefit from all the features and flexibility your lender has available such as offset accounts, limited fees, extra repayments, and the like.
Comparing application fees, ongoing fees, and comparison rates is also important when it comes to finding the lowest variable rate.
If you’re considering a home loan but don’t know what to look out for when it comes to variable rates, the comparison table above displays home loans with some of the lowest variable rates on offer for Australians.
What types of variable-rate home loans are there?
Most lenders offer different types of variable-rate home loans to choose from. The most common include basic variable-rate home loans, introductory (honeymoon) discount variable-rate loans, and standard variable-rate home loans.
Basic variable-rate home loan
As the name suggests, a basic variable-rate loan is a simple home loan that tends to offer little in the way of features in return for a lower interest rate and lower fees (ongoing and at application). For example, a basic home loan may have a discount of 0.20% p.a. on its interest rate, but may not come with an offset account. If you aren’t fussed about all the bells and whistles, then a basic home loan can be a good option.
Introductory discount variable-rate home loan
An introductory home loan, or sometimes known as a ‘honeymoon’ loan, offers a discounted interest rate for an initial set period, usually one to three years. Once the period ends, the rate switches to the ‘ongoing rate’ or ‘revert rate.’ When this happens, you want to be on the lookout that your revert rate is competitive, as you don’t want to end up paying more than you should. This type of variable-rate home loan can be limited in features so it’s always best to check with each lender on what they offer.
Standard variable-rate home loan
With flexible features such as redraw, offset facilities, and the ability to make extra repayments, standard variable-rate home loans are among the most common in Australia. However, the borrower generally pays a higher interest rate compared to a basic variable-rate loan.
Variable-rate home loans can vary depending on the lender. Some lenders will offer features like an offset account, while others may only allow you to make extra repayments. Some offset accounts will be 100% offset accounts, while others may only be 50% offset accounts.
Ultimately, while a variable interest rate works the same way in principle, the rate itself may be different between lenders as well as the mortgage’s accompanying features.
Frequently Asked Questions
One of the easiest ways to compare variable home loan rates is by using a home loan comparison table, which you’ll find on this website. With a comparison table, the rates and features of a number of different home loans are clearly visible in one place. From here, you could choose to do some further research by going to the lender’s website and learning more about the home loan’s specific features.
When comparing variable interest rates it’s important that you look at both the advertised rate and the comparison rate, because the comparison rate is designed to reflect the home loan’s extra costs, such as upfront and ongoing fees. A home loan with a low advertised rate but a high comparison rate is likely to come with high fees.
An attractive perk of using a variable rate home loan is the flexibility that’s available to you. Unlike fixed rate home loans, many variable rate home loans allow you to make unlimited extra repayments. This can help you pay off your home loan faster, which means that you’ll likely save on interest charges over time. Additionally, some variable rate home loans will come with features like an offset account, redraw facility, flexible repayment schedules, ability to pay off the loan early without fees, ability to refinance without breaking your agreement, and more.
If you have a variable rate home loan, you can pay it off early by making extra or early repayments. Paying off your variable rate home loan early means you'll save money on interest, and you won't be slapped with early break fees.
Variable rate home loans can vary depending on the lender. Some lenders will offer features like an offset account, while others may only allow you to make extra repayments. Some offset accounts will be 100% offset accounts, while others may only be 50% offset accounts. Ultimately, while a variable interest rate works the same way in principle, the rate itself may be different between lenders as well as the mortgage’s accompanying features.