What Is A Variable Home Loan Rate?

Published: August 21, 2019

If you’re buying your first home, you might be wondering if a variable mortgage is the right option for you. Before you decide, make sure you understand its pros and cons and whether its features meet your requirements.

A variable interest rate is a type of home loan that fluctuates (rises and falls) with the market. As the market interest rates change, so will your repayments. Generally, variable home loan rates come standard with features such as an offset account, redraw facility and the ability to make additional repayments without penalty.

Take note: ComparingExpert and consultants are not mortgage brokers. The information provided in this article is to help you make an informed decision. Please contact your home loan provider or financial institution for advice and guidance.

Advantage and disadvantages of a variable rate mortgage

Pros Cons
More features available and the freedom to choose between the different types of variable home loans. Uncertainty of repayment amounts, due to fluctuating interest rates.
Shorten your mortgage period and reduce your interest rates by making additional repayments on top of your scheduled mortgage payments, with no penalty. Difficult to budget as repayments may fluctuate significantly.
Lower repayments when interest rates are favourable according to the market. Your repayments will increase if market rates go up.
Certain home loan providers may be able to provide you with lower monthly fees compared to a fixed rate mortgage. Introductory discounts may result in higher repayments after the discount expires.

How does a variable mortgage rate work?

A variable mortgage is a flexible home loan option that moves with the market. Generally, variable interest rates fluctuate after the monthly cash rate meeting, held by the Reserve Bank of Australia. By taking advantage of these fluctuating rates, you might pay less for your home loan in the long-run. However, you might end up paying more; variable repayments amounts are uncertain.

How are variable home loans calculated?

Several aspects will influence how your home loan is calculated, including:

  • Choice of Lender: Every home loan provider has its own rate tier structure, which is why you might want to shop around and compare home loans from some of Australia’s major Lenders.
  • The Reserve Bank's Official Cash Rate: In Australia, the official cash rate is generally set the first Tuesday of every month.
  • The term of your home loan: Loans that are taken over a shorter period, for example, 15 years instead of 30 years, will generally have lower interest rates.
  • How much you are borrowing: If you borrow a large sum of money, you will generally be charged higher interest rates. However, you might also receive more significant discounts and access to more benefits.
  • Loan to value ratio (LVR): If you have a high LVR, meaning you're borrowing a larger amount with a lower deposit, your repayments will be higher. By choosing a less expensive home or by making a larger deposit, you can generally decrease your interest rates.
  • Additional repayments: By making extra repayment each month, you save more on your interest rates.
  • Repayment frequency: Typically, home loan providers allow repayments to be made weekly fortnightly or monthly. The more frequently you make repayments, the less interest you will generally pay.

Different types of variable home loans

There are generally two different variable interest rate options to choose from, including:

Basic variable rate

A basic variable home loan is typically associated with lower repayments as it has fewer features. This type of variable interest rate might be suited to homebuyers who want a cheaper home loan without the additional bells and whistles.

Standard Variable Rate

A standard variable home loan will often have a range of flexible features. For example, an offset account, the ability to split your loan, the option to make extra repayments, and loan portability. However, this type of home loan is often associated with additional fees and slightly raised interest rates to compensate for the variety of features included.

General features available on a variable home loan

Lower introductory rates

Certain loan providers will offer discounted interest rates for the initial loan period. Introductory discounts are generally valid for the first 12 months. However, they could last as long as four years, depending on your mortgage provider. After this period has expired, the standard variable rate will usually be applied.

Offset account

The funds in your offset account will be linked to the balance on your home loan, thus possibly reducing your interest rates. For example, if you have $50,000 in your offset account and a home loan balance of $150,000, you will typically only be required to pay interest on $100,000 of the principal amount.

Extra repayments

Making extra repayments on top of your regular mortgage payments can help you pay off your home loan sooner. Generally, there are no penalty fees attached to making additional repayments.

Redraw facilities

After you have made extra payments on your home loan, you may be allowed to access it when you need it, for example, redesigning a room in your house.

How to compare different variable rate home loans

Before deciding if a variable interest rate home loan meets your requirements, you might want to compare similar loans from some of Australia's major providers to determine which one offers you the best option. Be sure to review their:

  • Interest rate: Compare which home loan provider offers the lowest interest rate, as this will determine how much you need to pay each month.
  • Comparison rate: The comparison rate combines the Lender’s interest rate with all the extra, upfront fees you have to pay.
  • Features: Before settling on a variable rate home loan, look at the features that are available and if it benefits you.

Frequently asked questions and answers

How often does the variable rate change?

The interest rate is determined by the official cash rate of the Reserve Bank of Australia. This rate is typically set on the first Tuesday of every month (excluding January). Loan providers will then generally pass on the decrease or increase to their borrowers.

Who offers variable interest rate home loans in Australia?

Generally, most home loan providers in Australia offer variable interest rate mortgages. However, you might want to consult with a professional to help you find a variable rate home loan that meets your requirements.

Should I get a variable rate mortgage?

If you want access to all the additional features and are comfortable with the uncertainty of fluctuating interest rates, then a variable home loan might meet your requirements. However, please speak with a mortgage provider to help you decide if this home loan type is worth it for you.

What is the best variable home loan rate?

The current variable interest rate is determined by a variety of factors, for example, your deposit amount, the market rates as well as the frequency of your repayments. To find the best variable rate home loan for you, it may be a good idea to consult a mortgage broker or compare interest rates.

Is a variable rate better than a fixed term home loan?

With a fixed rate mortgage, you generally have the security of a set interest rate for a specified period. However, a variable rate mortgage may prove to be advantageous when interest rates fall. One home loan option isn't necessarily better than the other; it all depends on your requirements and budget.

Should you split your variable home loan?

The decision to split your home loan between a variable and fixed term rate depends on your requirements. However, splitting your home loan could help you pay off your mortgage sooner, while also allowing you to access additional features.

Can I switch from a variable to a fixed home loan?

Generally, yes, if you have a variable home loan, you might have the option to convert your loan to a fixed-rate home loan. However, you’ll have to ask your provider whether they offer this option and what the consequences are.

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