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What is a variable rate home loan?

A variable rate home loan is a home loan with an interest rate that is subject to change throughout the life of the loan. Fluctuations to interest rates occur as a result of changes made to the official cash rate, which is set by the Reserve Bank of Australia (RBA).

When your variable home loan's interest rate rises or falls, your mortgage repayments will too.

The key difference between variable rate and fixed rate home loans is that fixed rate home loans will have a set interest rate for a period of time - usually between one to five years. After the fixed rate period, it will revert to the standard variable rate. Variable rate home loans will also tend to offer more financial flexibility than fixed rate loans.

What are the features of a variable rate home loan?

Variable rate home loans tend to offer borrowers more features than fixed rate home loans. While the types of features available will often differ from one loan product to the next, they may include the following:

Offset account

An offset account is a savings or transaction bank account that is linked to your mortgage. It works just like a standard bank account, but gives borrowers the opportunity to reduce their payable interest. 

Any money paid into an offset account is included when your lender calculates the interest owing on your mortgage. For example, if you have $250,000 owing on your mortgage, and $50,000 in your offset account, you would only be charged interest on $200,000 of your balance.

Extra Repayments

Some home loans may not allow you to make additional repayments on top of your monthly repayments without charge, and fixed home loans often have a limit. But, variable rate home loans tend to have more flexibility.

Making extra repayments onto your mortgage could get you ahead of schedule and come closer to making an early exit from the home loan, reducing the total interest repayments you’d make. 

Redraw Facility

A redraw facility allows you to withdraw any additional home loan repayments you’ve made, subject to the lending criteria. It enables you to work towards paying down your loan faster and reducing your interest charges, with peace of mind that you can access those extra funds if you need to.

Packages

Some lenders will package home loans with other financial products, like credit cards, transaction accounts or a line of credit. A home loan package could save you money, as you will typically only be charged a single loan account fee (or annual package fee) to cover all of the products within the package.

What are the pros and cons of a variable rate home loan?
  • Potential to save on interest charges if interest rates drop
  • More flexibility in repayment terms and features
  • Ability to refinance to a different home loan product and/or lender
  • Increased repayments if interest rates rise
  • Less predictability in terms of budgeting for repayments

How long can a variable rate mortgage last?

Most home loans have loan terms of 25 or 30 years, and a variable home loan will have a variable interest rate from day one.

In contrast, a fixed rate home loan will have a set interest rate for the first one-to-five years of the loan term, before it reverts to variable for the remainder of the term - unless you refinance to another fixed rate home loan.

Are variable rates right for you?

Whether a variable rate home loan is the right choice for you will depend on your individual financial situation and the kind of home buyer you are.

If you are a first home buyer:

Variable rate home loans may offer more flexibility, but the added security offered by fixed rate home loans can appeal to borrowers who are first getting into the property market. A set interest rate can provide certainty and may help simplify your budgeting while you focus on building up your equity.

If you are an investor:

Variable rate mortgages often appeal to property investors, because if interest rates stay low, their repayments can remain relatively affordable, allowing them to maximise the return on their investment property. Plus, access to features such as offset accounts and redraw facilities on your investment loan can help to further minimise interest repayments.

If you are refinancing:

Whether you’re refinancing an investor or owner occupier home loan, you may wish to consider a variable rate mortgage to help keep your repayments down, as well as potentially gain access to other cost-saving features.

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Would a split interest rate be better in the long term?

If you're finding it hard to decide between a fixed rate home loan and a variable rate home loan, you could consider a split rate home loan and split the interest rate on your mortgage between fixed and variable.

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 loan percentage.

It is generally up to you to decide what proportions of your home loan will have a fixed rate and a variable rate. For example, if you have a $400,000 mortgage, you may decide on a clean 50:50 split, or you might decide on a 25:75 split with $100,000 on a fixed interest rate and the remaining $300,000 on a variable rate.

On a split loan, you may be able to benefit from access to flexible features, such as an offset account or a redraw facility, and the ability to make additional repayments on the variable rate portion, while also benefiting from more consistent repayments from the portion with the fixed interest rate.

Whether you choose a variable, fixed or split rate home loan, it's important to look at more than just the advertised home loan interest rates. Sometimes low rate home loans charge high ongoing fees, costing you more overall than some other loans with higher rates and low or no fees. A helpful way to estimate the value of different mortgage deals is to look at different comparison rates, which combines the cost of interest and standard fees into a single percentage.

How to compare variable rate home loans

When comparing your home loan options, it's important to look at more than just the interest rate that's on offer. Here are some important factors to consider:

Deposit options

You’re often more likely to enjoy lower variable interest rates on your mortgage if you can afford a full deposit on your property. This added security helps to reduce the lender’s risk. The deposit size required for a mortgage varies by lender, though 20 per cent of the property 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 if you were to default.

Keep in mind that, depending on your state or territory and whether you're a first home buyer or not, you may have to pay stamp duty on your property. This can range in the tens of thousands of dollars, so factor this potential cost into your deposit budget.

Loan term

Most home loans have terms of 25 or 30 years, though shorter and longer home loans may also be available.

When deciding on the length of your loan term, it’s important to remember that the longer it is, the more affordable your repayments might be, but the more you'll likely pay in interest charges.

Further, if you choose an interest-only home loan, choosing to only pay interest for a set period of time will mean you're not reducing your principal at all in that period. For that reason, many borrowers opt for principal & interest loans to chip away at their loan amount. 

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.

Introductory rates

Another thing to keep in mind is that lenders may offer introductory variable home loan rate discounts, or honeymoon rates, as special offers to entice new borrowers onto their books. The introductory period may even include perks like fee waivers, cashback offers and more. 

After a set period of time, these introductory rates will then revert to a generally higher standard variable rate. If you choose a home loan offering a low introductory rate, ensure you know not only the exact period of time of this honeymoon period, but also what the lender's standard variable rate is. This way you can consider refinancing to a new, low rate loan once this period has ended if you find the ongoing rate is too high.

Compare variable rates from a wide variety of lenders

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Compare our 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 when buying your new home. You can look at the current RBA cash rate and compare it to the other interest rates, and 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.

RateCity ranks home loans from over a hundred banks and lenders, providing our top home loan choices through our rating system, Real Time Ratings. Every home loan you compare at RateCity features a star rating from one to five, with our system comparing advertised rate, comparison rate, fees, flexibility, and other features to work out which home loan might suit you best.

Alternatively, if you're looking for more help finding a variable rate loan that best suits your financial situation, it may be worth reaching out to a mortgage broker for additional help and information.

What is the difference between fixed, variable and split rates?

Fixed rate

A fixed rate home loan is a loan where the interest rate is set for a certain amount of time, usually between one and 15 years. The advantage of a fixed rate is that you know exactly how much your repayments will be for the duration of the fixed term. There are some disadvantages to fixing that you need to be aware of. Some products won’t let you make extra repayments, or offer tools such as an offset account to help you reduce your interest, while others will charge a significant break fee if you decide to terminate the loan before the fixed period finishes.

Variable rate

A variable rate home loan is one where the interest rate can and will change over the course of your loan. The rate is determined by your lender, not the Reserve Bank of Australia, so while the cash rate might go down, your bank may decide not to follow suit, although they do broadly follow market conditions. One of the upsides of variable rates is that they are typically more flexible than their fixed rate counterparts which means that a lot of these products will let you make extra repayments and offer features such as offset accounts.

Split rates home loans

A split loan lets you fix a portion of your loan, and leave the remainder on a variable rate so you get a bet each way on fixed and variable rates. A split loan is a good option for someone who wants the peace of mind that regular repayments can provide but still wants to retain some of the additional features variable loans typically provide such as an offset account. Of course, with most things in life, split loans are still a trade-off. If the variable rate goes down, for example, the lower interest rates will only apply to the section that you didn’t fix.

What are the different types of home loan interest rates?

A home loan interest rate is used to calculate how much you’ll pay the lender, usually annually, above the amount you borrow. It’s what the lenders charge you for them lending you money and will impact the total amount you’ll pay over the life of your home loan. 

Having understood what are home loan rates in general, here are the two types you usually have with a home loan:

Fixed rates

These interest rates remain constant for a specific period and are a good option if you’re a first-time buyer or if you’re looking for a fixed monthly repayment. One possible downside of a fixed rate is that it may be higher than a variable rate. Also, you don’t benefit from any lowering of interest rates in the market. On the flip side, if rates go up, your rate won’t change, possibly saving you money.

Variable rates

With variable interest rates, the lender can change them at any time. This change can be based on economic conditions or other reasons. Changes in interest rates could be beneficial if your monthly repayment decreases but can be a problem if it increases. Variable interest rates offer several other benefits often not available with fixed rate home loans like redraw and offset facilities and free extra repayments. 

What is a variable home loan?

A variable rate home loan is one where the interest rate can and will change over the course of your loan. The rate is determined by your lender, not the Reserve Bank of Australia, so while the cash rate might go down, your bank may decide not to follow suit, although they do broadly follow market conditions. One of the upsides of variable rates is that they are typically more flexible than their fixed rate counterparts which means that a lot of these products will let you make extra repayments and offer features such as offset accounts.

What is a standard variable rate (SVR)?

The standard variable rate (SVR) is the interest rate a lender applies to their standard home loan. It is a variable interest rate which is normally used as a benchmark from which they price their other variable rate home loan products.

A standard variable rate home loan typically includes most, if not all the features the lender has on offer, such as an offset account, but it often comes with a higher interest rate attached than their most ‘basic’ product on offer (usually referred to as their basic variable rate mortgage).

What is the difference between a fixed rate and variable rate?

A variable rate can fluctuate over the life of a loan as determined by your lender. While the rate is broadly reflective of market conditions, including the Reserve Bank’s cash rate, it is by no means the sole determining factor in your bank’s decision-making process.

A fixed rate is one which is set for a period of time, regardless of market fluctuations. Fixed rates can be as short as one year or as long as 15 years however after this time it will revert to a variable rate, unless you negotiate with your bank to enter into another fixed term agreement

Variable rates is that they are typically more flexible than their fixed rate counterparts which means that a lot of these products will let you make extra repayments and offer features such as offset accounts however fixed rates do offer customers a level of security by knowing exactly how much they need to set aside each month.

Fact Check Verification

The information on this page was fact checked by Tony Harris, a broker in New South Wales specialising in home loans, go-between loans, and commercial property loans. For more information on how brokers like this can assist you, look for a broker near you