Many of the home loans found on the Australian market come with variable interest rates, where the amount of interest a lender charges on the mortgage is based on the official cash rate set by the Reserve Bank of Australia (RBA). These popular home loans offer plenty of financial flexibility, though variable rates aren’t ideal for every borrower.
At RateCity, you can quickly compare variable rate home loans from a range of different lenders all in one place, and narrow down your shortlist of mortgage options to buy a new home, make a property investment, or to refinance your existing home loan.
Benefits of a variable rate mortgage
Home loans with variable interest rates can often prove to be quite affordable. Because most lenders base their variable interest rates on the RBA’s official cash rate, if the cash rate falls, your lender may pass this rate cut on to you, lowering your home loan repayments. Smaller repayments can make more money available in your budget to save or spend as you please, though one possible option could be to pay extra onto your mortgage and get ahead of your scheduled repayments. This can bring you closer to paying your loan off ahead of schedule, potentially reducing the total amount of interest you’ll pay over the lifetime of your loan.
Variable rate mortgages also tend to be more flexible than their fixed rate counterparts, which are more likely to lock you into set repayment plans with restrictions on making additional repayments. Plus, with a variable rate home loan, you’re more likely to enjoy access to optional bonus features, such as offset accounts or redraw facilities.
Risks of a variable rate mortgage
There are financial risks with every home loan, including variable rate mortgages. If the RBA increases Australia’s official cash rate, your lender will likely pass this rate rise on to you, increasing the cost of your repayments. It’s possible that an extended period of regular interest rate rises could leave you in financial stress, struggling to repay a loan that was once easily affordable.
Also, it’s important to remember that many lenders charge fees as well as interest on their home loans, which can make a big difference to their overall cost to you. Home loans with low interest rates and high fees can sometimes turn out to be more expensive in total than those with higher interest rates and lower fees.
Variable Rate Home Loan Pros & Cons
- Interest rate cuts can reduce repayments
- Flexible repayment options
- Interest rate rises can increase repayment
- Less consistent budgeting
To get a better idea of the potential impact that different home loans may have on your finances, look at their Comparison Rates. These figures combine each loan’s advertised interest rate with its standard fees and charges, so you can estimate its average total cost.
Keep in mind that a home loan’s comparison rate may not take nonstandard fees and charges into account, nor will it account for any of the extra features offered by certain lenders that may add value to the loan.
Split rate loans
If you’d like to limit the impact of rate changes on your home loan, while still enjoying some flexibility, you can consider splitting the interest rate on your mortgage.
In this arrangement, your lender will charge a fixed rate of interest on a percentage of your home loan, and a variable rate of interest on the remaining balance. If rates rise, the fixed percentage will help to keep your repayments stable and affordable. And if rates fall, you’ll still enjoy some savings on repayments for the variable percentage.
Loan term length
Most home loans have terms of 25 or 30 years, though shorter and longer options are also available. It’s important to consider how long you want to take to pay off your mortgage, partially because the longer your loan term, the greater the likelihood that your variable interest rate will rise, and bring up your home loan’s repayments with it.
What’s more, the longer your home loan, the more repayments you’ll need to make, each one for a smaller percentage of your loan’s principal. This can help to keep your loan’s monthly cost more affordable, however the increased number of repayments could lead to you paying more interest in total over the lifetime of the loan.
Shorter home loans allow you to get your property fully paid off more quickly by paying a greater percentage of the principal each month. While this can make your repayments more expensive, you’ll likely pay less in total interest over the lifetime of your loan.
You’re often more likely to enjoy lower variable interest rates on your mortgage if you can afford a full deposit on your property, as this added security helps to reduce the lender’s risk. The deposit size required for a mortgage varies by lender, though 20% of the property’s value is common.
If you can’t afford a full deposit on the property you want, there may still be home loan options available to you. Some lenders offer mortgages with a high Loan to Value Ratio (LVR), where you pay a smaller deposit and borrow a greater percentage of the property’s value. However, your lender may require you to pay Lender’s Mortgage Insurance (LMI) to keep them protected in case you default on your loan.
Alternatively, you may be able to have a parent or other close relative serve as your guarantor, using the equity in their property to guarantee your home loan in lieu of a deposit. This option can allow you to sidestep LMI, though it may also put the guarantor’s finances at risk.
Are variable rates right for you?
While variable rate mortgages may be accessible to first home buyers, the added security offered by fixed rate home loans can often prove appealing to borrowers who are first getting onto the property market and want to keep their finances under control while they build up their equity.
Variable rate mortgages often appeal to property investors, because if interest rates stay low, their repayments can remain relatively affordable, allowing buyers to maximise the return on their investment. Plus, access to offset accounts, redraw facilities and the like can help to further minimise interest repayments.
Similarly, when refinancing a property, whether you’re an investor or an owner occupier, you may wish to consider a variable rate mortgage to help keep your repayments on the low side, and to potentially gain access to other cost-saving features.
Offset accounts and redraw facilities
Mortgages with variable interest rates often offer flexible repayment terms, which can include features that provide further financial flexibility.
One such feature is an Offset Account – a savings or transaction bank account that’s linked to your mortgage. As well as serving as a typical bank account of its kind, any money paid into an offset account is included when your lender calculates the interest owing on your mortgage.
If you’ve paid back $200,000 of a $500,000 loan, and have $15,000 in your offset account, your next interest payment will be calculated as if you only owed your lender $285,000, rather than $300,000.
A Redraw Facility is another nice little feature that can help encourage you to minimise your home loan’s interest. A redraw facility allows you to withdraw any surplus balance you’ve paid onto your loan, subject to your lender’s terms and conditions. Being able to free this money up in case of emergency can be quite handy, and allow you to add spare cash onto your home loan with confidence. By making extra repayments onto your mortgage, you’ll get ahead of schedule and come closer to making an early exit from the home loan, reducing the total amount of interest you’ll pay.
Variable rates from banks and non-bank lenders
A variable rate home loan from a bank may allow you to enjoy additional benefits from the bank’s other services, such as transaction accounts, credit cards and more. Plus, you’ll have the option of visiting a bank branch to organise your mortgage in person. However, bank home loans often have fixed lending criteria, and mortgage terms that may not alwys suit your financial situation.
Non-bank lenders may be able to offer highly competitive variable interest rates, as well as more flexible terms and conditions that can help provide a more personalised lending service. However, these smaller lenders may not be able to offer the same kind of value-adding features as certain banks. Plus, some non-bank lenders are online-only businesses that operate without branches or shopfronts, and may not be ideal if you’d prefer not organise your home loan online and over the phone.
Compare variable rate home loans
At RateCity, there are several options available to help you find the ideal variable rate home loan to suit your financial situation. You can look at the current RBA cash rate and compare it to the other interest rates on the market with the RateCity RBA Rate Tracker. You can also use our calculators to estimate how much you could borrow, or the affordability of different loans.
And of course, you can also compare the interest and comparison rates of a wide variety of variable rate home loans all in the one place, and quickly narrow down your shortlist of lenders to consider when selecting your variable rate home loan.