Variable rate home loans
It’s not surprising that variable-rate home loans are popular in Australia. Their flexible features make them attractive to a wide range of people. But is a variable rate home loan really the best option for you? What features should you look for? And are there any downsides to consider? In this article, we discuss the pros and cons of variable-rate home loans and highlight the features available to help you make the most of your mortgage.
What is a variable rate home loan?
When applying for a mortgage, there are two main types of interest you can choose from; fixed and variable. A fixed rate mortgage locks in an interest rate for the first few years of the loan. A variable rate, on the other hand, changes in line with market movements.
What are the pros and cons of a variable rate home loan?
Take advantage of rate decreases
If the market rates decrease, the interest rate on your variable rate home loan will also decrease, saving you money.
Variable rate home loans are usually much more flexible than their fixed counterparts. This means that if you find a better deal or a cheaper loan, it’s easier to switch lenders if you have a variable rate mortgage.
You can pay off your loan ahead of schedule
Variable rate home loans will allow you to make extra repayments on top of your regular repayments, usually without fees or restrictions. The quicker you can pay off your loan, the more money you’ll save.
Flexible features available
There are a host of money-saving features which are available on variable rate home loans. We’ll discuss some of these in more detail below.
Vulnerable to rate increases
If the market rates go up, then your mortgage rate will also rise, and your home loan could become much more expensive.
Difficult to budget for
Because the interest on a variable rate home loan keeps changing, the repayment amounts will also change, making budgeting difficult.
What are the money saving variable rate home loan features?
Since variable rate home loans allow you to make extra repayments ahead of schedule, they also let you redraw these extra payments if you need them. Many lenders offer this as a free service.
An offset account is a savings account that reduces your interest costs. For example, if you put $20k of savings in an offset account and your loan value is $100k, then you’ll only pay interest on $80k. The great thing about an offset account is that it works like a normal bank account, in that you can deposit your wages in it, and make payments and withdrawals using a debit card. The downside is that some lenders will charge you administration fees for running the account.
Package financial products
Many lenders will offer you a discount if, along with your mortgage, you use their savings account, credit card, etc.
What are the features of other types of home loans?
Low deposit loans
Many lenders will allow you to take out a mortgage with a deposit of less than 20% of the property value. Generally speaking, the smaller your deposit is, the riskier the loan is for the lender, and so they’ll charge you higher interest rates. You will also likely have to pay for lender’s mortgage insurance (LMI).
Interest-only variable home loans allow you to pay just the interest for the first few years of the loan, without repaying any of the principal. These types of loans are usually geared towards investors.
Still can’t decide between a fixed-rate and a variable rate home loan?
You may want to consider a split loan. A split loan allows you to have a variable interest rate on a portion of your loan and a fixed-rate on the rest. This partially protects you against interest rate fluctuations, while still giving you some of the flexible features of a variable rate home loan.
Top tips to get the best variable rate home loan
This can save you money on several levels. Firstly, the more you save, the less you need to borrow, and so you won’t need to spend as much on your home loan. Secondly, lenders offer cheaper interest rates to people with large deposits. Thirdly, if you can put down more than 20% as a deposit, you can avoid paying lender’s mortgage insurance.
Since home loans are large and long-term, getting the wrong loan can cost you thousands of dollars. We help you shortlist the best variable rate deals. When comparing your options, always read the details carefully, before you apply.
While the bells and whistles can seem attractive, the costs can really add up in the long run. Consider carefully if you need the extra features and whether their benefits outweigh the costs.
Because the repayments on variable rate loans change, it’s important to give yourself some wiggle room when you’re setting up a budget.
The longer you have a loan for, the more expensive it will be. If you have a variable rate home loan with flexible repayment options, then you may want to opt for larger regular repayments over a shorter loan-term (provided you can afford to). If you find you have extra cash to spare, consider putting this on your loan as an extra repayment. Paying principle and interest throughout the loan without any interest only period will see you finish off your loan sooner as well.
It’s important to remember that if the Reserve Bank reduces rates, each lender decides if they will pass this reduction on to their customers. Some may only pass on a portion of the rate cut, while others will pass on the whole amount. Since you have the flexibility to change lenders, it pays to keep an eye out for the best variable rate deals.