Typically variable home loan rates adjust with the ebb and flow of the official cash rate set by the Reserve Bank of Australia – although individual lenders can also make independent adjustments to their own rates.
While borrowers have no control over the home loan interest rate (unless they choose to fix the rate), the reality is that a variable rate home loan is usually cheaper than a fixed rate home loan over the long term.
The main benefit with a variable home loan rate is its flexibility when compared to a fixed rate home loan. However, flexible features such as ‘redraw facilities’ and a ‘mortgage offset account’, are offered sometimes in exchange for a slightly higher interest rate than a fixed rate home loan (but this depends on the lender).
Making extra repayments into your home loan helps shave the interest you will pay over the term of the loan. A ‘redraw’ facility gives you access to these additional payments should you hit a financial speed bump such as a medical emergency, a job loss or some other family event.
With a variable home loan, rates fluctuate, so it is smarter to pay more into your home loan when the interest rate is low. This will create a financial buffer that you can redraw from if the rate rises.
Mortgage offset accounts
A mortgage offset account is like a bank account, which is linked to your variable rate home loan. The money in your transaction account is offset against the outstanding balance of your home loan, which means you end up paying less interest. For instance, if you have an outstanding balance of $200,000 and your offset account has $20,000 in it, you will only pay interest on $180,000 ($200,000- $20,000). There may also be tax benefits attached to mortgage offset accounts and you should talk to your accountant for more information.
As with any home loan advice, the key is to examine your own financial situation and contact an expert for professional advice. It helps to know your stuff so don’t be afraid to carry out your own research by comparing Australian variable rate home loans and use the mortgage repayment calculator to crunch your numbers.