Variable Rate Home Loans Explained

Are you a first home buyer? Variable rate home loans could make your dreams a reality. Find out exactly what’s involved as well as the potential costs with Monzi’s comprehensive breakdown. Check it out.

Please note, certain ideas and products presented in this article may not be offered by Monzi nor the lenders we work with. This article presents only general information. Consider seeking professional financial, taxation, legal or other advice to check how the information and ideas presented on this website relate to your unique circumstances.

What are variable rate home loans?

Variable rate home loans are the most common mortgages that you will encounter. In short, their name reflects exactly what they are.

Where a fixed rate is held constant throughout your loan term, a variable rate is free to change based on various market forces. As a result, your rate can go up or down which will ultimately have an impact on the amount of interest that you pay.

In most cases, they are valued for their flexibility and the additional features they can include (e.g. redraw facilities, the option to make additional repayments). This is in stark comparison to fixed rates where your repayments are set and there’s little room to move.

Comparing variable rate home loans

There are plenty of lenders willing to offer home loans. With so much choice available, there’s potential to save yourself thousands just by shopping around.

If you’re not sure what to consider then aim to compare loan products based on the following:

  • Interest rate. Expressed as a percentage of the principal amount. This rate is subject to change, often in accordance with the Reserve Bank of Australia’s cash rate.
  • Fees and charges. You will be charged a number of fees, depending on your loan product. These charges can have a big impact on the total cost of your loan, so keep an eye on them.
  • Comparison rate. Combines the interest rate plus most of the fees and charges into one percentage figure. This helps you get an idea of the true cost of your loan.
  • Loan term. The length of time you are given to pay your loan within. This will affect what your regular repayments look like.
  • Features. Does the loan come with features like an offset account or a redraw facility. We’ll explore both of these later.
  • The lender. What is the reputation of your lender? Are their reviews positive? Does the lender hold all the appropriate licences?

For further advice on selecting the right home loan, visit MoneySmart’s dedicated webpage. It might be able to help you make a more informed decision. Check it out.

Benefits of a variable rate mortgage

In general, mortgages that come with a variable interest rate can often be a more affordable option than a fixed-rate. This is often because most home loan lenders base their variable rate on the Reserve Bank of Australia’s (RBA) cash rate.

Specifically, if the RBA lowers their cash rate, your lender may pass these savings on to you.

By saving on your repayments, you can put extra money towards other parts of your life or even make extra repayments. Ultimately, this brings you closer to settling your mortgage and owning your house outright.

Finally, variable rate loans are generally more flexible than fixed-rate finance. More specifically, you’re more likely to be able to make extra repayments for free. In addition, these loans often come with bonus features, including:

  • offset accounts; and
  • redraw facilities.

What are the dangers of variable rate home loans?

The danger is in the name. Given that the interest rate is variable, it is liable to move. If the rate increases you will find yourself paying additional interest which you may be unable to afford.

Given this, a variable rate represents uncertainty too. Your rate isn’t locked in which can make budgeting and projecting harder. Although, over time it has been found that a variable rate will usually save you money in the long-run.

Fixed, variable and split interest rates: what’s the difference?

When it comes to your interest rate, you have three choices. You can select a fixed, variable or split rate.

Firstly, a fixed rate is self-explanatory. Your rate is held constant through your loan term meaning you know exactly what you will be required to pay.

On the other hand, a variable rate will change based on the underlying market forces on which your interest rate depends. If the interest rate rises, you’ll pay more interest. If it falls, you’ll be able to pay off more of your principal amount.

Finally, a split rate combines elements of both. For instance, you may have 60% of your loan at a fixed rate with the other 40% being subject to a variable loan. With this, you can potentially maximise the benefits and minimise the costs associated with both rate-types.

How can I get the lowest rate possible on variable rate home loans?

While your lender determines the rate you are offered, there may be a few things you can do to access a better rate.

Firstly, having a good credit score is vital. If you’re a reliable borrower with a consistent track record then lenders will usually view your application more favourably.

In addition to this, paying more upfront as a deposit can also be a handy option. With this, lenders won’t have to lend you as much meaning their risk is decreased. Obviously though, you will need to save up for longer.

While these suggestions may help you access a more competitive rate, nothing is
certain. Lenders will assess your application and offer the interest rate that they see fit.

Should I select a fixed term on my home loan?

Some variable rate home loans will come with the option to lock in a fixed rate for a two, three or five year period. While we cannot say if this is the right choice for you, it does provide a number of benefits.

In the initial stages of your mortgage repayments, a fixed period allows you to lock in your repayments. With this, budgeting is made easy as you know exactly what you will need to pay.

In addition to this, if you’re in a period of market uncertainty then a fixed rate can potentially protect you against unfavourable interest rate movements.

However, if you opt to fix your rate for a period, consider the costs. A five year fixed period will typically cost you more than a two year period in the form of a higher rate. In essence, you must pay a premium for the security and certainty.

What is a basic variable rate home loan?

In short, a basic home loan is one which offers fewer features than a standard mortgage, but also comes with lower rates and fees. As a result, this type of loan may be popular among borrowers looking to lower their repayments.

In other words, these no-frills loans forgo the bells and whistles of traditional home loans, like offset accounts, in exchange for a simpler, cheaper option.

What features do basic variable rate home loans come with?

While a lot of the typical features of a home loan are not included in a basic option, these basic loans still come with a number of features that may make them an attractive option. For example, common features include:

  • Lower rate. Often the most attractive feature of basic variable rate home loans. You may be offered a lower interest rate compared to the standard variable rate.
  • Extra repayments. Most lenders allow you to make additional repayments when you want for no extra cost. This, however, may vary between lenders.
  • Lump sum repayment. If you come into a large lump sum of money, you can put that towards repaying your mortgage without incurring a fee.
  • No account-keeping fees. Most of these loans forgo the monthly account-keeping fees typical of other mortgages.
  • No early repayment fees. Lenders will not charge you a fee if you pay your mortgage out early.
  • Top-up. Depending on your lender, you may be able to increase your original amount if you need extra cash.

Pros and cons of a variable rate basic home loan

While the price point of these loans is often a major drawcard for Aussie consumers, there are other factors you should be aware of.

Here are the main pros and cons of using a basic home loan:

Pros

  • Lower interest rate
  • Very low or nonexistent ongoing fees
  • Make interest-only repayments if you wish
  • Extra payments without incurring fee.

Cons

  • Variable rates are always subject to change
  • Repayments increase if rates rise

Do variable rates ever go down?

Yes, of course.

Variable rates can move in either direction. This movement is based on a number of economic factors outside of your control. Moreover, they can often be difficult to predict too.

While understanding this information may not be necessary, it’s worth having a general understanding of it. As a guide, factors that can lead to changes in variable rates include:

  • The supply and demand of credit
  • Regulatory changes
  • The cash rate
  • Inflation
  • Changes implemented to enhance economic growth.

Variable rate home loan bird's eye view shot of suburban street

How often do variable rates change?

In short, it’s difficult to say.

Technically speaking, your interest rate can change as often as monthly. Your rate is based on a number of underlying economic factors so in times of uncertainty, instability of change, it may change often.

However, in Australia, markets tend to be relatively stable. As a result, it is quite possible for your rate to remain stable for a period of months.

At the end of day, it’s usually wise to expect a number of changes each year. Obviously some will be favourable while others will be unfavourable. Ultimately though, it’s out of your control.

How much can variable interest rates change?

Speaking on a month-to-month basis, interest rates typically will not vary by more than a fraction of a percentage.

As a general rule, these changes are usually divided into quarters of a percent. In other words, rates may go up or down by 0.25%, 0.5% 0.75, etc. each month.

While these changes may only seem minor, they can add up over time. After all, for most mortgages we’re talking about terms of up to 30 or 40 years. As a result, the costs or savings of these changes can range into the thousands.

Which bank offers the lowest interest rates on home loans?

In short, Monzi is unable to say. As a result, it is up to you to do your own research.

Banks will vary in the rates and terms they offer. As a result, it should be relatively straightforward to compare different home loan products to find the one that works best for you.

If you’re still unsure, there are comparison websites that exist which bring together loan products from a host of different lenders making side-by-side comparisons simple. Alternatively, you could potentially seek qualified mortgage advice too.

A mortgage is by far the single largest financial commitment that you will make in your lifetime. So, leave no stone unturned in your search for the right loan.

Is a bank my only option for a home loan?

No.

While traditionally banks have been the main providers of home loans, the market has changed. These days there are now a number of specialist home loan lenders including a couple who offer a 100% online-based service.

For consumers, this is great news. Competition gives you the opportunity to shop around to find the best possible deal. As a result, you can compare rates and terms offered by banks against those offered by online lenders. Securing more favourable terms can potentially save you thousands of dollars over the course of your loan.

Do loan repayments decrease over time?

No.

In most cases, your regular mortgage repayment will remain consistent across the term of your loan. What will decrease however, is your interest payment.

Interest is charged on the principal amount that you owe. With this, consumers pay considerably more interest at the start of their loan when compared to having a smaller outstanding balance later in your term.

What criteria must I meet to be approved?

In short, lenders don’t take home loans lightly. They will be lending you a considerable amount of money and as a result, they want to be absolutely certain that you have the capacity to repay it.

While exact requirements and criteria will vary, lenders will typically assess the following:

  • Your employment status
  • Credit history
  • The size of your deposit
  • Your current financial situation (i.e. savings, income, expenses)
  • The property and it’s value
  • Is there a guarantor on your loan?

What documents do I need before applying for variable rate home loans?

The documents you must provide typically fall into three categories: assets and liabilities, proof of identity and proof of income. See below for each categories requirements:

Identification

You must prove your identity. Documents that you may be may need to provide include:

  • Birth certificate
  • Current passport (or expired if it was valid in the previous two years)
  • Citizenship certificates
  • Driver’s licence
  • Photo ID
  • Medicare card
  • Utility bill featuring name and address

Proof of income

Obviously, you will need to prove that you are earning a consistent, regular income. With this, lenders will typically ask you to supply payslips stating your year-to-date income. Usually this will be your most recent payslip, however, some lender may require multiple. It will simply come down to your lender’s individual policy.

If you earn income from multiple streams then you will need to provide evidence for each. This may include:

  • Rent received from an asset
  • Shares: your portfolio as well as any dividends that you receive
  • Centrelink benefit payments (where applicable)

Assets and liabilities

To understand your complete financial situation, lenders will require more than just knowledge of your income. As a result, you will need to supply the details of any assets that you hold and any current liabilities.

Typically, assets include cars or property that you own as well as term deposits and high-interest savings accounts. On the other hand, liabilities can include on-going loan repayments, like car loans and other outstanding debts (e.g. credit cards).

What’s the variable rate home loan application process?

The process usually includes six distinct steps beginning with your application and ending with settlement (the transfer of home ownership to you).

Obviously, to get the ball rolling you will need to submit an application. From there, your lender will assess your eligibility and if you meet the criteria you will receive conditional approval. In short, this is simply an estimate of the amount that they may be able to lend you.

From there, credit checks and verification will be completed and a property valuation will be conducted. If everything goes to plan, based on that information you will receive full approval. At that point, the only thing left to do is settle.

What repayment term is best?

In short, it depends on your financial situation. Lenders usually offer mortgages with terms ranging from 10 to 40 years. Obviously, the length that you choose will influence your repayments.

The shorter your term, the bigger your regular repayments will be. Conversely, the longer your term, the smaller your regular repayments will be; however, consumers pay more in overall interest.

Given this, the general advice is to select the shortest possible term that you can afford comfortably. In other words, find the balance between your loan term and repayments that you can afford based on your income and budget.

Variable rate home loan – common terms

As you browse online for loans, you will likely see some familiar term pop up time and time again. So, to better help you find a great deal, we’ll explain a few of these terms below.

What is a comparison rate?

Comparison rates help you get a better idea of the true cost of your loan. In short, they combine the interest rate plus most of the fees and charges you’re expected to pay into a single figure, expressed as a percentage.

In short, comparison rates help you estimate a total average cost of a mortgage, and better compare options from different lenders.

Keep in mind, however, this rate may not factor in all the potential charges and fees. For example, the comparison rate may not include fees for late or missed payments.

Finally, remember that variable rates are obviously subject to change.

What are offset accounts?

An offset account is simply a savings or transaction account linked to your home loan. More specifically, any money put in your offset account is included in the lender’s calculations of what’s owing on your mortgage.

To put it in a very simple working example. If you have $200,000 owing on your mortgage, but $50,000 in your offset account for the month, your daily interest is calculated on $150,000 for that month.

How does a redraw facility work?

Put simply, a redraw facility works by letting you withdraw any surplus you’ve paid into your loan. This is, however, subject to your lender’s own terms, conditions and policies.

Being able to make extra payments, knowing you can withdraw them if an emergency strikes may be an attractive option for consumers. In fact, making extra payments brings you closer to being debt-free and an outright homeowner.

What is a standard variable rate?

A standard variable rate (SVR) is the rate various lenders apply to their standard mortgage. More specifically, this variable rate is often used as the point by which other home loan rates are measured against.

These standard rate home loans include most of the normal features the lender offers. This could include an offset account or redraw facility. However, these loans often have higher rates than their most basic option. This is known as their basic mortgage. You can find more information listed above.

Variable rate home loans and Monzi

While we’ve done our best to provide an in-depth variable rate home loan breakdown, unfortunately, Monzi is unable to offer this product.

However, what we may be able to help with is personal finance. Through our lender-finder service we can potentially make it simple and convenient to find lenders online offering personal loans from $300 to $10,000. With a range of repayment terms on offer, a personal loan could be an option if you find yourself dealing with a cash shortfall.

The table below details the loans you may be able to apply for:

Small personal loan$300 to $2,000Over 12 months
Medium personal loan$2,001 to $4,60013 to 24 months
Large personal loan$5,000 to $10,00013 to 24 months

Monzi may be able to pair you with a potential lender in under 60 minutes if you apply today. Scroll up and use Monzi’s loan slider to begin your application today.

Factor In

Costs

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You won't use a penny to apply for our lender-finding service, but here's some costs you could expect from a lender

Loan amount

$300 - $2,000

Terms

12 months

Costs

20% upfront establishment fee

+ 4% monthly fee

Example

Loan Amount of $1,000 over 6 months repayable weekly (25 weekly repayments). $1,000 (Principal Amount) + $200 (20% Establishment Fee) + $240 (fees based on 4% per month over 25 weeks) = $1,440 total repayable in 25 weekly installments of $57.60.

Under the current legislation, most small personal loan providers don’t charge an annual interest rate (you’ll know this as an APR) %. The maximum you will be charged is a flat 20% Establishment Fee and a flat 4% Monthly Fee. The maximum comparison rate on loans between $300 and $2000 is 199.43%. This comparison rate is true only for the examples given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate

Loan amount

$2,001 - $4,600

Terms

13 months

24 months

Costs

48% annual percantage rate

67.41% comparison rate p.a.

Example

Loan Amount of $3,000 over 18 months repayable weekly (78 weekly repayments). $3,000 (Principle Amount) + $400 (Establishment Fee) + $1,379.06 (reducing interest) = $4,779.06 total repayable over 18 months with weekly installments of $61.27.

The Interest Rate for Secured Medium Loans is 48%. The Typical Comparison Rate is 67.41% p.a. WARNING: This comparison rate is true only for the examples given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate with the lender that finances your loan. Click here to see a worked example.

Loan amount

$5,000 - $10,000

Terms

13 months

24 months

Costs

21.24% annual percantage rate

48% comparison rate p.a.

Example

Loan Amount of $10,000 over 24 months repayable weekly (104 weekly repayments). $10,000 (Principle Amount) + $5,577.12 (Interest) = $15,577.12 total repayable over 24 months with weekly installments of $149.78.

The Interest Rate for Secured Large Amount Loans is 48%. Maximum Comparison Rate is 48% p.a. WARNING: This comparison rate is true only for the examples given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate with the lender that finances your loan. Click here to see a worked example.