When you're looking to achieve home ownership or invest in property, choosing the right home loan products is one of the most important financial decisions you'll make. Among the various home loan options available from banks and lenders across Australia, variable rate home loans remain a popular choice for many Australians seeking flexibility and potential savings.
What is a Variable Interest Rate Home Loan?
A variable interest rate home loan is a type of loan where your interest rate can move up or down throughout the life of your loan. Unlike a fixed interest rate home loan where the rate stays the same for a set period, variable home loan rates fluctuate based on market conditions and decisions made by your lender.
This means your home loan repayments can change over time. When rates decrease, you'll pay less each month. When they rise, your repayments increase. While this might sound unpredictable, variable rate loans often come with valuable home loan features that can help you build equity and improve borrowing capacity over time.
Key Benefits of Variable Rate Home Loans
Variable rate home loans typically offer more flexibility than their fixed counterparts. Here are some home loan benefits to consider:
- Offset Account Options: Many variable home loan packages include a linked offset account or mortgage offset feature, which can help reduce the interest you pay on your loan amount
- Additional Repayments: You can usually make extra repayments without penalty, helping you pay off your loan faster and build equity
- Portable Loan Features: Some variable loans are portable, meaning you can transfer them to a new property
- Redraw Facilities: Access extra funds you've paid into your loan when you need them
- Rate Discount Opportunities: Lenders often provide interest rate discounts for variable products, especially for owner occupied home loans
Understanding Rate Movements and Discounts
When comparing current home loan rates, you'll notice that variable interest rates often start lower than fixed rates. Lenders may also offer rate discounts based on your loan to value ratio (LVR), the size of your loan amount, and whether it's an owner occupied home loan or investment property.
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It's worth noting that a lower LVR (meaning you have a larger deposit) can help you secure more favourable interest rate discounts and potentially avoid Lenders Mortgage Insurance (LMI). This is why building a solid deposit before your home loan application can make a significant difference to your overall borrowing costs.
Split Rate Options for Balanced Flexibility
If you're torn between variable and fixed options, you might consider a split loan or split rate arrangement. This home loan feature allows you to divide your loan amount between a variable interest rate portion and a fixed interest rate portion.
With a split rate approach, you can:
- Protect yourself from rate rises on part of your loan
- Maintain flexibility and access to features on the variable portion
- Potentially benefit from rate decreases while having some certainty
- Customise the split percentage to suit your risk tolerance
Principal and Interest vs Interest Only
When setting up your variable rate loan, you'll also need to choose between principal and interest repayments or interest only repayments. Most owner occupied home loans use principal and interest, where each repayment reduces both the interest charged and the actual loan amount.
Interest only loans, commonly used for investment properties, involve paying just the interest for a set period (usually 1-5 years). While this means lower repayments initially, you're not building equity during the interest only period. After this term ends, your loan typically converts to principal and interest, which can result in higher repayments.
Comparing Home Loan Rates and Features
When conducting a home loan rates comparison, don't just focus on finding the lowest rates. Consider the complete home loan packages on offer, including:
- Available offset account options
- Redraw facility terms and conditions
- Additional repayment flexibility
- Application and ongoing fees
- Loan features that align with your financial goals
For those searching for their first home loan, understanding these features is crucial. You might also be eligible for government schemes like the First Home Guarantee Scheme, which can help reduce your deposit requirements and LMI costs.
Calculating Home Loan Repayments
Calculating home loan repayments on a variable rate loan requires considering that your repayments will change as rates move. Many borrowers plan for potential rate increases by:
- Calculating repayments at a higher interest rate than the current rate
- Setting up an offset account to reduce interest charges
- Making additional repayments when possible
- Regularly reviewing their loan to ensure it still meets their needs
If you need lower repayments due to changing circumstances, variable loans offer the flexibility to adjust your loan structure, though this should be discussed with a professional.
When to Consider Refinancing
Your current home loan might not be serving you as well as it could. Refinancing to a new variable rate loan can help you:
- Access better interest rate discounts
- Unlock additional home loan features
- Consolidate debts to improve financial stability
- Take advantage of improved borrowing capacity
A regular loan health check ensures you're not paying more than you need to and that your loan structure still supports your goals, whether that's to achieve home ownership, invest in property, or secure your financial future.
Getting Started with Your Variable Rate Home Loan
When you're ready to apply for a home loan, working with a mortgage broker gives you access to home loan options from banks and lenders across Australia. A broker can help you compare rates across multiple lenders, understand complex home loan features, and find a variable rate product that matches your situation.
Whether you're after home loan pre-approval, looking to refinance, or exploring options for your first property purchase, understanding variable rate loan terms puts you in a stronger position to make informed decisions about your financial future.
Variable rate home loans offer flexibility, features, and the potential to save when rates fall. By understanding how they work and what to look for, you can choose a loan that helps you build equity, maintain financial stability, and work toward your property goals.
Ready to explore your variable rate home loan options? Call one of our team or book an appointment at a time that works for you. At Personalised Finance, we'll help you access home loan options from banks and lenders across Australia and find a solution tailored to your needs.
