In Australia you have the choice to fix your home loan rate or select a variable rate home loan. Variable rate home loans are a popular choice for Australians, however individual financial circumstances differ greatly and will dictate which home loan type will best suit you.
How are variable rates set?
In Australia, the variable home loan rates are influenced by the Reserve Bank of Australia (RBA), although the lenders such as the banks, credit unions and building societies can (and do) move their own interest rates independently of the federal bank.
The advantages of variable rate home loans
The main advantage of having a variable rate is if the cash rate decreases then your home loan interest rate should decrease also.
Another important advantage is the flexibility it enjoys over a fixed rate mortgage. However, flexibility may come at a cost, so features such as ‘redraw facilities’ and ‘mortgage offset account’, will usually involve a borrower paying a slightly higher interest rate than with a fixed rate mortgage.
Some variable home loan rates include a low introductory or ‘honeymoon’ rate for an initial period before they revert to a standard variable rate home loan.
A possible catch with these home loans is that when the honeymoon period finishes, the low variable home loan rate bumps up to a, generally higher, standard variable rate.
The most effective way to pay your home loan off quickly is by making extra repayments. With a variable home loan, rates climb up and down in tandem with market conditions. Therefore it makes sense to pay more off your mortgage when interest rates are lower.
In essence, a ‘redraw’ facility also helps to buffer you from mortgage stress, by allowing you access any additional repayments should you hit a financial speed bump, like a job loss, in the future.
Mortgage offset accounts
A mortgage offset account is a bit like a savings account that is attached to your variable rate home loan. The money in your savings account is then offset against the balance of your home loan, so you only have to pay interest on the balance. For example, let’s assume you have an outstanding home loan balance of $500,000 and your offset account has $50,000 in it. In this instance, you will only pay interest on $450,000 ($500,000- $50,000).
It’s always worth considering your own financial situation before deciding on a home loan, and once you have a handle of your finances, why not compare home loans online or use the repayment calculator to work out which option is better for you financially.