Understanding Variable Rate Home Loans
When you're applying for a home loan, the advertised interest rate often grabs your attention first. However, the true cost of your variable rate home loan extends far beyond the interest rate itself. Understanding the various fees and costs associated with your home loan is crucial for making an informed decision about which home loan products suit your financial situation.
Variable interest rate home loans offer flexibility that many Australians find appealing. Unlike a fixed interest rate home loan, your variable home loan rates can move up or down in response to market conditions. While this means you could benefit from rate reductions, it also means you need to understand all the costs involved to properly calculate home loan repayments and budget accordingly.
Upfront Costs When Taking Out a Variable Rate Loan
When you apply for a home loan, several upfront fees can add thousands of dollars to your initial costs. Here are the main charges you should be aware of:
Application Fees: Some lenders charge between $0 and $1,000 to process your home loan application. This covers the administrative costs of assessing your situation and preparing loan documentation.
Valuation Fees: Lenders typically require a professional property valuation, which can cost between $200 and $600 depending on the property type and location. This ensures the loan amount aligns with the property's market value.
Settlement Fees: These cover the legal costs of transferring the property title and registering the mortgage. Expect to pay anywhere from $500 to $1,500.
Lenders Mortgage Insurance (LMI): If your loan to value ratio (LVR) exceeds 80%, you'll likely need to pay LMI. This protects the lender if you default on your loan and can cost anywhere from a few thousand to tens of thousands of dollars, depending on your loan amount and deposit size.
Ongoing Fees Throughout Your Loan Term
Beyond the upfront costs, variable rate loans come with ongoing charges that affect your financial stability over time:
Monthly Account Keeping Fees: Many lenders charge between $10 and $30 per month to maintain your loan account. Over a 30-year mortgage, this can add up to significant costs.
Annual Package Fees: If you've chosen one of the home loan packages that bundle multiple home loan features together, you might pay an annual fee ranging from $200 to $400. These packages often include benefits like offset account facilities and interest rate discounts.
Offset Account Fees: While an offset account can help you build equity faster by reducing the interest charged on your principal, some lenders charge monthly fees for this home loan feature. These typically range from $10 to $20 per month.
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Flexibility Fees and Charges
One of the key home loan benefits of variable rate products is their flexibility, but some of these features come with associated costs:
Additional Repayment Fees: While most variable rate loans allow extra repayments without penalty, some lenders cap the amount you can pay above your regular repayment. Exceeding this cap might incur fees.
Redraw Fees: If you've made extra repayments and want to redraw those funds, some lenders charge between $20 and $50 per transaction, though many now offer this feature at no cost.
Portability Fees: If you have a portable loan and want to transfer it to a new property, you might face charges ranging from $200 to $500.
Exit and Switching Costs
Understanding the costs of leaving your variable rate loan is just as important as knowing the entry costs:
Discharge Fees: When you pay off your loan completely or switch to another lender, expect to pay discharge fees between $300 and $600. This covers the administrative costs of closing your account and removing the mortgage from the property title.
Break Costs: While variable rate loans typically don't have break costs like fixed interest rate home loans, if you have a split loan with both variable and fixed components, breaking the fixed portion can result in substantial charges.
Comparing Home Loan Options Across Lenders
When you compare rates and home loan features, looking at the comparison rate is essential. The comparison rate includes the interest rate plus most ongoing fees, giving you a more accurate picture of the true cost. However, it doesn't include all fees, so you still need to review the fine print.
Different lenders across Australia offer varying fee structures. Some offer low or no monthly fees but higher interest rates, while others provide interest rate discounts in exchange for higher upfront or ongoing charges. Access home loan options from banks and lenders across Australia to find the structure that suits your circumstances.
Strategies to Minimise Your Loan Costs
There are several ways to reduce the fees and costs associated with your variable rate home loan:
- Negotiate fee waivers: Many lenders will waive application fees, particularly if you're a strong borrower
- Use a linked offset account effectively: The interest savings can far outweigh any monthly account fees
- Consider your LVR carefully: Even a small increase in your deposit to bring your LVR below 80% can save thousands in LMI
- Look at package deals: If you need multiple home loan features, a package with an annual fee might cost less than paying for each feature separately
- Improve borrowing capacity: A stronger financial position often qualifies you for rate discounts and lower fees
Making Informed Decisions About Variable Rate Loans
Whether you're looking at your first home loan, wanting to invest in property, or considering refinancing your current home loan rates, understanding the full fee structure is vital. Variable rate loans suit borrowers who want flexibility and the potential to benefit from rate decreases, but you need to factor in all costs to determine if this home loan option aligns with your goal to achieve home ownership and secure your future.
For owner occupied home loans or investment properties, the fee structure can vary significantly. Some lenders offer different pricing for principal and interest versus interest only loans, and the home loan features available might differ based on your loan purpose.
A Home Loan pre-approval can help you understand exactly what fees apply to your situation before you commit to a property. This gives you certainty about your borrowing position and helps you budget accurately for your purchase.
When reviewing home loan products, don't just focus on finding the lowest rates. A loan with slightly higher interest but lower fees might cost less overall, particularly if you're borrowing a smaller loan amount or plan to pay off your mortgage quickly. The need for lower repayments should be balanced against the total cost of the loan over time.
Understanding variable rate loan fees and costs empowers you to make decisions that support your financial goals. At Personalised Finance, we work with clients nation-wide to access home loan options that match their circumstances, explaining all costs upfront so there are no surprises.
Call one of our team or book an appointment at a time that works for you. We can help you compare your options and find a solution tailored to your needs.
