Variable rate home loans are very popular in Australia and can come with some great features and benefits, but also have some limitations and differences when compared to fixed rate home loans. Learning the difference will help you choose the right structure for your home loan.
The vast majority of lenders offer an offset account on their variable rate home loans. An offset account allows you to reduce the interest paid on your home loan each month.
Variable rate home loans typically have no restrictions on making additional repayments. If you’re looking to pay extra off your home loan, a variable rate home loan may be right for you!
If you have made extra repayments, most variable rate home loans will allow to access these funds if you wish to. This functionality is called ‘redraw’ and can be used in place of offset in certain circumstances.
Unlike fixed rate home loans, which may have a fixed rate break cost payable if you close the loan, there are generally no additional fees for paying out a variable rate home loan. However, any home loan pay out will usually include fees from the lender for processing the discharge.
Your loan doesn’t need to be 100% fixed or variable. A mix of both may be more appropriate for your needs and give you the best of both worlds- flexibility with a variable portion and certainty of repayments with a fixed rate portion.
The main limitation of a variable rate home loan is that your interest rate can change during the loan term. This can be as a result of RBA changes or lender changes. If you would prefer certainty with your interest rate, consider a fixed rate home loan or a a split home loan.
If your interest rate is changed, the required monthly repayments on your home loan can also increase (or decrease, of course). This can make budgeting more difficult with a variable rate home loan.
Navigating your options and knowing what to consider when structuring your home loan comes from experience. As your mortgage broker, we will walk you through your available lender and interest rate options along with the pros and cons of each.
Things to consider when looking at variable rate home loans include:
You will need to have details ready of your existing assets, liabilities and expenses, as well as basic information like employment and address history. This information can be provided in our secure client portal
This will include payslips if you are in a salaried or PAYG role and tax returns, notices of assessment and financial statements if you are self-employed
The bank will review your credit file and check your credit enquiries as well as existing account conduct and repayment history. Having a clean credit file is essential when applying for a home loan. If you have concerns about your credit history, please let us know and we can review your file before any application is lodged
All variable rate home loan applications have a requirement for either a sufficient deposit (if you are purchasing) or sufficient equity in your property (if you are refinancing). We will work this out for you if you aren’t sure you have a sufficient deposit or equity.
As your mortgage broker, Simplifi Lending will review your lender options across more than 40 top home loan lenders. We will also:
See our Home Loan Application Process page for full details and more information.
Once your loan is settled, Simplifi Lending are your ongoing point of contact. We are here to assist with anything to do with your home loan (no more sitting on hold to the banks!). We can assist with:
Worried that a low deposit will result in a bad variable rate? We work with lenders who are happy to fund home loans with 90% LVR (10% deposit), and while 80% LVR (20% deposit) is the minimum requirement for some lenders, there are lenders that will allow 10% (or lower in some cases).
Equally, if you have 60% LVR (40% deposit), we will compare and find the very best deal for you from our large pool of lenders.
Want to know you borrowing capacity and are ready to get started? Talk to an expert mortgage broker for your free Preliminary Assessment today!
Interest rate changes are often caused by changes in the official cash rate from the Reserve Bank of Australia (RBA). However, lenders can also change their rates for other reasons including:
If your current lender increases their rates out of step with the RBA, it may be worth reviewing the other options in the market to see if there are more competitive offers.
Yes, generally a switch from a variable rate home loan to a fixed rate is fine with most lenders. Going the other way (from a fixed interest rate to a variable home loan) is usually not such a simple switch and may incur additional fees to break the fixed rate.
If you are on a variable interest rate with your current lender that is not competitive, you can ask them to review this rate and they may offer you a better interest rate to retain your business. If this rate is still not competitive, then you have the ability to look at refinancing your home loan.
It is also very common for lenders to offer ‘carded’ or advertised interest rates that are substantially higher than what is actually available from that lender by negotiation. As your mortgage broker, we will negotiate for the best possible interest rate with your chosen lender when we are preparing your application.
These are the two main repayment types on offer with most lenders. Principal and interest (P&I) repayments are where a portion of the original amount borrowed (the principal) is paid off with each home loan repayment. Interest only repayments are where only the interest charged is paid to the lender each month, with no principal being repaid. Principal and interest rates are typically lower than interest only rates.
What type of home loan you are applying for and whether or not your property is an investment can impact which of these may be appropriate for you.
An introductory interest rate (also called a ‘honeymoon’ interest rate) is an offering from a lender where the interest rate is lower for an initial period (often 1-3 years) and then reverts to a substantially higher rate after this period.
These may be the right offer for you under certain circumstances, but our usual suggestion is to avoid these if there is a comparable rate that doesn’t elapse after a certain amount of time.
A split home loan is where a home loan is structured partly with a variable interest rate and partly with a fixed interest rate. This doesn’t have to be a 50/50 split and can be almost any combination (i.e. 90/10, 70/30 etc.). The main benefit to a split home loan is you get access to offset and repayment flexibility with the variable interest rate portion, and interest rate and repayment certainty with the fixed interest rate portion.
The answer to this really depends on your personal circumstances including:
We will discuss the above in further detail as part of your free Preliminary Assessment.
