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Key takeaways:
- For new home loans, the average variable interest rate is currently 6.28% p.a., according to the latest RBA data.
- Most home loans in Australia, whether for owner-occupied or investment properties, have a variable rate.
What is a variable rate home loan?
A variable rate home loan is the most common type of mortgage in Australia, where the interest rate and the regular repayment can change over the life of the loan. Changes to variable rate home loans usually follow changes to the Reserve Bank of Australia’s (RBA) cash rate.
Unlike a fixed rate home loan, where your repayments stay the same for a set period (typically 1 to 5 years), repayments on a variable rate loan can go up if interest rates increase and go down if rates drop.
Most banks and lenders offer a range of variable rate home loans, many of which include features such as an offset account, a redraw facility, and options for making extra repayments.
Fact: When the RBA changes the cash rate, banks usually adjust the interest rates on variable rate home loans to reflect these changes. The RBA sets the cash rate based on economic factors like inflation and employment. If inflation is high (as it currently is), the RBA might raise the cash rate to help slow down the economy, which can lead to higher interest rates and more expensive mortgages. Conversely, if the economy is slowing, the RBA might lower the cash rate to encourage borrowing and spending, which can result in lower interest rates and ease mortgage stress.
Types of variable rate home loans
Here are three types of home loans with variable rates on offer:
1
Basic variable home loan
As the name suggests, this is a basic variable home loan with fewer features but usually offers a lower interest rate. For example, it might offer a 0.10% per year discount compared to other loans from the same lender, but it won’t have extras like an offset account or redraw facility.
2
Introductory variable rate home loan
Otherwise known as “honeymoon rates”, this type of home loan offers a discounted rate for an initial period, usually between 6 to 12 months. After this introductory period ends, the rate typically reverts to the lender’s higher standard variable rate. This type of home loan can provide you with some short-term savings but may lead to higher repayments once the introductory rate expires.
3
Split home loan
A split loan combines both fixed and variable rate components within the same mortgage. This gives you the stability of fixed rates for a portion of your loan while taking advantage of potential savings with variable rates for the remaining portion. You can normally split the mortgage by 50/50, 60/40 or 70/30.
Tip: If you’re considering a home loan with a variable rate, mortgage brokers can help you navigate your options. They can provide insights into current average variable interest rates as well as other lending data that’s relevant to your situation. Brokers will compare different loan products and lenders to find the best rate for your circumstances and explain how a variable rate could affect your repayments over time.
Should I choose a home loan with variable interest rates?
Choosing a variable rate home loan can be a good option depending on your financial situation and goals. Here are some reasons why you might consider a loan with variable rates:
- If interest rates fall, your rate might drop too, reducing your monthly repayments and total interest paid. Currently, variable rate loans generally have lower interest rates than fixed rate home loans, but this might change in the future.
- These loans usually offer more flexibility, where you can make extra repayments or pay off your loan faster without penalties. This can help you save on interest over time.
- Many variable rate home loans come with features like a redraw facility (which lets you access any extra repayments you’ve made) and an offset account (which reduces the interest you pay by offsetting your loan balance with your savings).
- It’s often much easier to refinance your home loan and avoid paying exit fees.
What happens if interest rates go up?
While there are pros to choosing a variable rate home loan, there are also some potential downsides. Firstly, your repayments may increase if interest rates go up, which can affect your budget. If rates increase significantly, your loan repayments might become higher than what you initially planned.
Additionally, variable rates can be tricky to budget for because they can change over time. During the pandemic, many borrowers chose to lock in their rates while they were low to keep their repayments predictable for a set period of time. However, the bulk of these low fixed rate loans have now expired, with the vast majority of borrowers now on variable rate loans.
How rate changes can affect your mortgage repayments
This table gives you an idea on how a small interest rate change can impact your minimum monthly repayments.
Variable interest rate | Loan amount |
|---|---|
5.85% | $700,000 |
6.00% | $700,000 |
6.15% | $700,000 |
Variable interest rate | Loan term |
5.85% | 25 years |
6.00% | 25 years |
6.15% | 25 years |
Variable interest rate | Monthly repayments |
5.85% | $4,446.14 |
6.00% | $4,510.11 |
6.15% | $4,574.51 |
Variable interest rate | Extra cost in monthly repayments |
5.85% | N/A |
6.00% |
|
6.15% |
|
| Variable interest rate | 5.85% | 6.00% | 6.15% |
|---|---|---|---|
Loan amount | $700,000 | $700,000 | $700,000 |
Loan term | 25 years | 25 years | 25 years |
Monthly repayments | $4,446.14 | $4,510.11 | $4,574.51 |
Extra cost in monthly repayments | N/A |
|
|
What to look for when comparing variable rate home loans
Here are some factors to consider when looking at variable rate home loans:
Interest rate
The interest rate is the percentage you pay on the amount borrowed, and it’s crucial to compare rates across different lenders. A lower interest rate means lower monthly repayments and less interest paid over the loan term. Check to see whether the rate is introductory or standard, as some lenders offer lower rates initially to attract new customers, but then increase after 6 or 12 months.
Fees and charges
Look at all associated costs, including application fees, annual fees, and early repayment fees. Some loans might have lower interest rates but higher fees (hint: the comparison rate will indicate the loan’s overall cost). Getting to know these fees helps you work out the true cost and avoid any surprises.
Features and flexibility
Evaluate the features offered with the loan, such as the ability to make extra repayments, a redraw facility, or an offset account. These features can provide great benefits by allowing you to pay off your loan faster or reduce the amount of interest you pay.
Loan terms and conditions
Review the fine print on your loan, including any limitations or restrictions on any features that are included. For example, you may have an annual limit on how much extra you can pay into your loan.
You might also want to consider the lender’s customer service quality by checking reviews and ratings (even awards) to ensure it’s reliable and responsive. Good customer service can make managing your loan easier and more pleasant, especially if you need assistance or have questions.
