Your guide to variable rate home loans

Learn more about variable rate home loans in this helpful guide

When you buy or refinance your property, one important decision you’ll have to make is choosing between the different types of home loans available.

In this guide, we’ll take you through what a variable rate home loan is, the benefits and drawbacks, as well as the differences between a variable rate and fixed rate home loan.

What are home loan interest rates?

Home loan interest rates are essentially the cost of borrowing money from a lender and typically expressed as a percentage. They determine the amount of interest you pay on your home loan repayments.

For example, let’s say you have a home loan of $300,000, a loan term of 30 years and an interest rate of 2.12%. Your estimated monthly repayments would be $1,126 and you’d pay $105,703 in interest (the cost of borrowing money) over the life of your loan.

Borrowers can choose to repay their home loan at a variable, fixed or split rate. It’s useful to note that you are not limited to choosing one over the life of your loan and can switch between the three.

If you’d like to find out how much you might need to pay on your home loan, use our FND Mortgage Repayments Calculator.

What is a variable rate home loan?

A variable rate home loan has an interest rate that is subject to change monthly, depending on the lender.

On a variable rate home loan, if the interest rate increases, so do your repayments. If it decreases, so too do your repayments.

Who decides home loan rates?

Lenders decide home loan interest rates but they are influenced by a variety of factors. Each month, the Reserve Bank of Australia (RBA) sets the official cash rate (OCR).

Lenders typically use the OCR and other market conditions to determine their own rates, but can increase and decrease their rates independent of the OCR.

Why do interest rates change?

Interest rates can change due to a range of factors. Some of these include:

• A change in the OCR: the RBA sets the OCR on a monthly basis with the goal of supporting and strengthening the Australian economy. This typically influences the interest rates lenders offer

• Inflation and deflation: the condition of the Australian economy can largely affect the fluctuation of interest rates. Interest rates will typically drop when the economy is struggling and increase when the economy starts to recover. While high interest rates aren’t favourable for any borrower, they can be a good indicator of a stable and growing economy

• Increasing and decreasing cost of business: some lenders will increase or decrease their interest rates to match the ebb and flow of business costs for profit purposes

• To offer competitive rates: lenders may also increase and decrease their interest rates in correlation to other rates on the market. This allows them to remain competitive.

What are the benefits of having a variable rate home loan?

There are a range of benefits available for borrowers who decide to go on a variable rate home loan. These include:

• Unlimited extra repayments: if you’re on a variable rate loan, you’ll generally be able to make as many extra repayments on your home loan as often as you’d like

• Access to a redraw facility: variable rate home loans typically give users access to a redraw facility. This allows you to cash out funds outside of your minimum repayments that you’ve contributed to your home loan. Keep in mind that you’ll typically be charged a fee each time you redraw money. Additionally, some lenders will charge you a flat fee or activation fee to open a redraw facility

• Access to a 100% offset account: variable rate home loans typically give users access to a 100% offset account. Keep in mind that offset accounts often come with an annual fee, so they may only be worth it if you’re using this feature

• No break fees when switching home loans or refinancing:

because you aren’t bound by a fixed term (like on a fixed rate home loan), you won’t incur any break fees should you choose to switch home loans or refinance.

What are the drawbacks of having a variable rate home loan?

There are also a few potential drawbacks with variable rate home loans. Borrowers should be prepared because:

• Repayment amounts can change monthly: variable rate home loans can fluctuate month-on-month. So unlike fixed rate home loans, you should be prepared in the case they increase. On the flip side, if interest rates drop, you’ll benefit from this decrease

• If rates increase, repayments do too: in the case that interest rates rise, this will automatically increase your monthly repayment amount

• Less financial certainty and higher financial stress: due to the volatile nature of variable interest rates, you may feel overwhelmed when interest rates increase and your repayments do too.

Can you switch from a variable rate to a fixed or split rate home loan?

Yes, most lenders will generally let you switch from a variable rate to a fixed or split rate home loan without penalty.

A fixed rate home loan allows you to lock in an interest rate for a set period of time.

Regardless of rising or falling interest rates, a fixed interest rate remains the same for the fixed period of typically 1-5 years. This means your loan repayment amount remains the same each month over the set period.

A split rate home loan, also known as a partially-fixed interest loan, allows you to reap the benefits of both variable and fixed rate home loans.

For one portion of your split loan, your interest rate remains fixed, while the other portion provides you with more flexibility as the market changes. It’s important to note that the split doesn’t need to be 50/50.

Keep in mind that there may be other costs associated with refinancing, so it’s worth weighing the potential upfront costs with the long term benefits and savings.

You can always reach out to your local FND Broker to discuss if a variable home loan rate is right for you.