Variable Rate Home Loan

Over 50% of all mortgages in Australia are variable rate home loans, making them by far the most popular type of home loan. This popularity is driven by the fact that they offer a range of very useful features and enable borrowers some flexibility with how they repay the home loan.

The Interest Rates on Variable home loans increase and decrease in accordance with fluctuations in the rates set by the Reserve Bank of Australia (RBA). If interest rates rise, your mortgage repayments increase; if they fall, your payments are reduced. While RBA rates are a key influencer on the interest rate changes, Home Loan lenders are ultimately responsible for what interest rates are applied to their variable home loans.

Borrowers have a number of types of Variable Rate Home Loan to choose from, with most borrowers offering each type of Variable rate home loan.

1. Standard variable rate home loan - With this option the interest rate on the loan can be changed by the lender as and when they require. Generally these changes are made in response to interest rate changes made by the Reserve Bank of Australia, If interest rates rise your mortgage repayments will increase; if they fall, your repayments will be reduced. Standard variable loans are the most popular types of home loans in Australia as they include features designed to help you pay off your home loan quicker such as redraw facilities, extra repayment options and access to a line of credit. Standard Variable rate home loans are not restricted by LVR or loan amount and should include all the flexibility options including offset account, loan portability and the ability to split between fixed and variable.

2. Basic variable rate home loan - As with the standard option the interest rates on the basic option maybe changed by the lender. The key difference between the basic and the standard option is that the basic variable home loan includes less features and offers less flexibility for repaying the loan of quicker. This stripped back approach does lead to a positive in that the Basic option offers lower interest rates, which can be up to 0.5% lower than the standards rate.

3. Introductory rate home loans. These are variable rate home loans that offer a special discounted variable rate for an initial fixed period, usually between 1 and 3 years, which reverts to the standard variable rate at the end of the introductory period. These introductory or honeymoon rate home loans are popular with 1st homebuyers where minimizing the interest in the early stages of the home loan helps them get used to budgeting for the home loan repayments.

4. Full feature variable rate home loan - These loans seek to offer the greatest flexibility for borrowers by offering 100% offset account facilities, free extra repayments and free redraw. These full featured loans tend to include additional fees so it is important to establish if these additional fees are worth the flexibility and benefit the  offset account.

5. Variable rate package home loan. If you’re borrowing over $150,000 you may qualify for a packaged home loan, where you get a lower interest rate in return for “Packaging” other financial products like a credit card, transaction account and saving account with your home loan provider. These packaged loans generally attract an annual fee, though the discounted interest rates can be good and will often more than cover any annual fee, particularly if you are borrowing a large amount of money.

6. Low doc variable rate home loans - Low doc variable rate home loans are designed for borrowers whose income flows include some peaks and troughs that can be the case self-employed or seasonal workers. These fluctuations in income mean these applicants would be rejected for the standard home loan, as they do not meet the usual income evidence requirements lenders set. With a Low doc home loan the lenders use a bespoke approach to assessing the applicants income.


Variable Rate Home Loan Comparison

The challenge facing borrowers is working out which home loan option best fits their financial circumstances, here we help navigate through the options by providing a guide to some of the key loan features which should be included in your home loan comparison:

Competitive interest rate - Your home loan interest rate will determine how much your repayments will be, the critical thing to consider is that you are able to cover this repayment on an ongoing basis. It is a good idea to include the home loans Comparison Rate in your review as this rate includes revert interest rates and fees over the life of the loan. To understand the amount of your repayments try our free home loan repayment calculator.

Flexible Repayment of your Home Loan - The flexibility of the variable rate Home Loans is what has made this home loan type so popular, but remember these features are only valuable if you plan on using them and they do come at a cost as the interest rate is generally higher on loans including these features. Two features that are worthy of close consideration are the offset account, where you can minimize your interest costs by leveraging your free cash flow and free redraws which allow you to access any extra repayments you have made to your home loan at no cost.  

Variable Rate Home Loan Fees - These can include upfront/application costs such as establishment and valuation costs and ongoing fees which maybe applied when a redraw facility or offset account is assessed. In your comparison you should be looking for a home loan that has fee levels that are in synch with the interest rate and features of the home loan.

Eligibility to apply - Each home loan lender places limitations on the types of properties they will offer a loan on and the types of borrowers they will accept. It is therefore important to ensure you meet the eligibility requirements of the home loans included in your comparison including the type and size of the property, your income sources, and your loan purpose.

Frequently Asked Questions

What is a redraw facility and how can it help me?

A redraw facility is a basic home loan feature which allows you to make extra loan repayments when you have spare cash available, and access the funds later when money is tight. This is a great way to smooth the flow of your finances throughout the life of your loan. Most Australian home mortgages, including fixed and variable rate home loans, feature a redraw facility.