Key Takeaway Table
| Key Point | Description |
|---|---|
| Definition | A variable-rate mortgage is a type of home loan where the interest rate can change at any time during the life of the loan. |
| Advantages of a Variable Rate Home Loan | There are no break fees, giving you the freedom to make early repayments and to refinance your loan anytime. When the market trends point to decreasing rates, you can potentially make a lot of savings as your repayments also decrease. |
| Should You Choose a Variable Rate Loan? | You must consider your homeownership plans before choosing a variable-rate loan. If you’re not planning to live in your home long-term, this loan type can help you benefit from the initial low rates and you won’t have break fees when you sell. This loan type is also good for you if you are risk-tolerant and can withstand fluctuations in your repayments. This is also a good choice if you anticipate your income to grow in the future to allow you to make extra repayment and if it’s likely rates will decrease in the future. |
Variable-rate mortgages account for the majority in Australia, making up 70% of all home loans in the country. Many borrowers choose this type of mortgage due to several benefits, including they average out to lower rates over time and the flexibility variable loans provide. Is a variable-rate home loan right for your circumstances? Let’s take a look at how a variable-rate loan works and how it can benefit you.
What is a Variable Rate Home Loan?
A variable rate loan is a type of mortgage where the interest rate can fluctuate over the life of the loan. The variable interest rate affects the amount of your regular loan repayments. Whether the rates increase or decrease, your repayment amounts will typically be adjusted to follow.
Interest rates for variable-rate loans are based on a few factors, but the primary basis is the cash rate determined by the Reserve Bank of Australia (RBA). The RBA’s board conducts regular meetings to set the cash rate depending on the state of the economy. They may increase rates as part of a monetary tightening policy to curb inflation, or they may lower the rates to help stimulate the economy. As the RBA cash rates change, the banks’ and other lenders’ interest rates also follow, which will then affect your variable-rate loan.
Other factors include unforeseen national or global circumstances, like the COVID-19 pandemic. These worldwide events can strongly impact markets, thus also affecting interest rates.
Variable interest rates may also change depending on lenders’ discretion. Lenders may lower their interest rates to compete with other lenders. They may also adjust rates up when their funding costs rise and to bring greater revenue.
Finally, interest rates for variable-rate loans can be affected by the borrower’s profile. If the borrower is deemed to have a low loan-to-value ratio (LVR), a good credit score, and strong serviceability, they may secure lower interest rates than those with lower credit scores seeking a higher LVR from lenders.
Advantages of a Variable Rate Home Loan
No Break Fees
Fixed-rate loans have break fees if a borrower decides to refinance the loan before the fixed period ends. These break fees can be quite substantial. For variable-rate loans, there are no break fees, so borrowers are free to refinance their loans any time they want.
Potential for Lower Payments
Variable-rate loans are a great choice for when interest rates are falling or are predicted to fall. As the rates decrease, borrowers can enjoy decreased monthly repayments on their home loans. However, the reverse is also true. If the rates increase, borrowers will also have to pay larger amounts.
The Ability to Make Extra Repayments
Fixed-rate loans charge a significant fee if a borrower wants to make extra or early repayments. With variable-rate loans, borrowers are free to make extra repayments ahead of schedule, which can dramatically reduce the term of the loan and the total interest repaid.
Should You Choose a Variable-Rate Loan?
Many Australians choose variable-rate home loans due to the flexibility and the lower initial rates offered. However, is it the right loan type for you? Here are some factors you need to consider before making a decision:
Homeownership Plans
Variable-rate loans can be beneficial for those who plan to own a home for a relatively short period. If you anticipate selling or refinancing in the next few years, you can benefit from the flexibility without facing break fees.
Risk Tolerance
Borrowers with a higher risk tolerance are better suited for variable-rate loans. This loan type suits those who are confident in the direction of interest rates and are prepared to weather any short-term fluctuations.
Market Projections
Variable-rate home loans are best for periods where market trends show a potential decrease in interest rates.
Income Growth Expectations
If you anticipate your income increasing in the future the features of a variable-rate loan allow you to make extra repayments at any time. This can significantly reduce the term of your mortgage and save you many thousands of dollars in interest.
Get a Variable-Rate Loan
Could a variable-rate loan be the right option for you? Let a loan expert compare the market and provide the best recommendation for your circumstances.
