A variable rate home loan is one of the most common types of home loans offered in Australia. Customers are often attracted by the many useful features this loan type offers.

Unlike a fixed rate home loan where you lock in your interest rate for a fixed term, the variable interest rate varies according to the changes in the property market. With the official cash rate at an all time low, it’s a good a time as ever to take out a home loan.

By applying with the right lender, you can qualify for a home loan with a very competitive interest rate!

How do variable rates work?

Typically, the variable interest rates change in accordance to the changes in the Reserve Bank of Australia (RBA) cash rate and the Bank Standard Variable Rate (BSVR).

This means that in case the interest rates in the property market fluctuate, your repayments size will be higher or lower according to how it changes.

What is a variable rate home loan?

A variable rate home loan, as mentioned earlier, is a type of loan where the interest rates rise and fall according to the changes in the property market. These are one of the most popular types of home loans offered by lenders in Australia.

This type of mortgage comes offers a variety of useful home loan features such as 100% offset accounts, unlimited extra repayments and redraw facilities. Most lenders don’t even charge an application fee.

What does a variable rate loan offer?

There are several advantages to choosing a variable rate home loan, including:

• Easy availability: They’re readily available with most, if not all, lenders.
• Multiple features: You can get a number of useful loan features, such as the ability to make extra repayments and an offset account. This can help you lower your interest payments and you may even be able to pay down your mortgage quicker.
• Ease to refinance: You’ll have the flexibility to refinance with another lender to secure a better deal. However, if you have a fixed rate loan then you’ll need to pay discharge fees to exit the loan early, which can be quite significant.
• Decreasing interest rates: You can take advantage of any decrease in interest rates which are normally passed on to variable rates. This is because the variable rates vary according the fluctuation in interest rates. For example, even a 0.20% reduction in rates can make a significant difference in your repayments.

What features are available?

The most common features that are offered in a variable rate loan include:

• Flexible repayments: Variable rate home loans offer a flexible repayment option. For instance, you can choose to make unlimited additional repayments on the loan. This can help you pay down your mortgage sooner.
• Flexible loan term: You can choose a loan term for up to 30 years.
• Redraw facility: You’ll be able to withdraw any extra funds that you’ve deposited in the loan account. Keep in mind that you may be charged a redraw fee.
• Interest only option: Many lenders allow you to make interest only repayments for a fixed period of time. Interest only repayments only include the interest portion of the loan so the repayment size is significantly lower. You can check our Interest Only Home Loan page for more information.
• Split loan option: Some lenders give you the option of splitting your variable rate loan into different loan accounts with different interest rates. This often lets you enjoy the security of a fixed loan, while still retaining the flexibility of the variable rate.
• Offset account: An offset account is a special account that helps you to save interest on your home loan instead of earning interest. In other words, this allows you to pay off your loan sooner without even thinking about it.

Types of variable rate home loans

Lenders offer several types of variable rate home loans. These include:

• Basic variable rate home loans: A basic variable rate loan trades off several features, such as offset accounts and redraw facilities, for much lower interest rates and no ongoing fees. Some lenders even offer reduced or waived application fees.
• Package home loans: Package home loans offer certain discounts and fees with your home loan, in return for bundling your savings accounts and other financial products. Some lenders may charge an annual fee.
• Introductory rate home loans: Introductory rate home loans offer special discounted rates that usually apply for the first year over a home loan term. After a year, the interest rates will switch to regular rates. This type of loan is typically suitable for first home buyers or anyone looking for interest rate discounts for a certain period of time.
• Low doc variable rate loans: A low doc home loan is an alternative solution for those who can’t provide sufficient documents to prove their income. Low doc loans can also allow self-employed borrowers to get approved for a regular variable interest rate.
• Bad credit variable rate loans: Some lenders offer a bad credit solution for borrowers with bad credit, such as paid and unpaid defaults. Bad credit home loans have a more flexible credit history requirement but usually have higher interest rates and fees depending on your situation.

What else do I need to consider?

Aside from the pros, there are things that need to be considered before you apply for a variable rate home loan.

For example, they can be tough to manage because you can’t predict when the interest rates will move up or down. Also, rises in the interest rates may leave you in a difficult situation if your repayments are too high.

Generally, if your loan is over two years old then you should consider refinancing to another lender that offers a more competitive loan. This is because although you may get a good deal with a bank at the start of your loan, you will be charged fees and a higher interest as the loan progresses.

Keep in mind that banks don’t always advertise their lowest interest rates or may not pass on the full RBA rate cut unless you have a rate tracker home loan. You can check out our interest rates page to discover great interest rate deals that are on offer.

What are the costs involved?

On a variable rate loan, you’re required to cover the standard costs associated with a home loan. These costs include:

• Application fees: Most lenders don’t charge an application fee for a variable rate home loan.
• Valuation fees: When you valuate your property, you’ll usually be charged a fee.
• Conveyancing fee: You may be required to hire a conveyancer or solicitor to help you make financially sound decisions.
• Redraw fees: On a variable rate home loan, you can withdraw the additional funds that you’ve made from your loan account. Lenders may charge you a fee for this.
• Discharge fees: While the government has banned discharge fees for variable rate mortgages, lenders will still charge legal administrative costs. This can cost you from $150 to $400.
• Lenders Mortgage Insurance (LMI): As a general rule, you’ll be charged a fee if you’re looking to borrow over 80% LVR (Loan to Value Ratio). LMI is a one-off fee that is charged as protection for the lender in case the borrower isn’t able to repay the loan.

You can learn more about the costs to buy a home by using our Property Purchase Costs Calculator.

What are the disadvantages of a variable rate home loan?

Aside from the fact that it’s readily available and has access to several loan features, variable interest rates can be rather difficult to manage. Some of the main problems you can face with a variable rate home loan include:

• Expensive repayment sizes if the interest rates increase during the loan term. This is because variable rates vary according to the fluctuation in interest rate in the property market. This can also affect your serviceability, which is your ability to borrow.
• Difficulty to plan an accurate budget because the rates tend to fluctuate. Even a 0.25% rise or fall in interest rate will make a significant difference in the amount you’ll be paying. Allocating your budget to other costs can therefore be tough if your home loan repayments are high.

Choose the right lender!

It’s essential that you seek legal advice from a professional before you decide to apply for any home loan. Speak with your accountant or a professional financial advisor to find out what the financially sound decision will be.

Alternatively, you can speak with one of our experienced mortgage brokers to find out if you qualify and how much you can borrow. To speak with one of them, call us on 1300 889 743 or fill in our free online assessment form today.

Variable rate home loan FAQs

What’s the difference between P&I and interest only?

Principal and interest (P&I) repayments include the interest and a portion of the principal amount. Here, the principal amount is the loan amount that you borrow.

On the other hand, on an interest only payments, you only pay the interest portion of the home loan for a certain period of time, known as the interest only period. The interest only period usually lasts for 5 years.

Interest only repayments are, of course, much smaller than the P&I repayments, however, the actual loan will not be paid off.

What are break costs?

Lenders may require you to pay a fee for breaking out of the fixed rate contract to switch back to a variable rate. This fee is generally charged for making large loan payments, switching back to a variable rate or for closing your loan account.

Break costs are also known as break fees, an early repayment adjustment or an economic cost.

It’s important to keep in mind that break costs can be very significant. They can often be in excess of $10,000, and in some cases in excess of even $100,000! You can learn more about this on our fixed rate break fees page.

Can I withdraw my repayments?

A variable rate home loan normally has a redraw facility that allows you to withdraw any extra repayments you’ve made on your home loan. However, you may be subject to a redraw fee and a redraw limit when you apply.

How much deposit do I need to buy a home loan?

Most lenders require you to have at least 20% of the property value as a deposit for the loan. There are some lenders that only accept genuine savings as a deposit.

As a general rule, you will be required to pay a mortgage insurance fee or LMI if you’re borrowing more than 80% of the purchase price.

Despite this, you may be able to get approval with as little as 5% or even no deposit if you apply with the help of a guarantor. The key is to apply with the right lender.

What if I pay my mortgage off early?

Most lenders often charge a discharge fee or exit fee in case you pay off your loan early. This can cost from $150 to $400 depending on the lender you apply with.

Therefore, it’s important to make sure that you properly read the terms and conditions before you apply.