Rate tiers of variable loans, what does this mean?
Many variable rate home loans have rate tiers, which means that as a borrower if you meet certain criteria you will be offered a different rate from someone who does not. For variable rate home loans these are determined by two things: how much you are borrowing and your loan to value ratio. Sometimes it can be a combination of both factors.
Loan amount: Lenders traditionally reserve their most competitive rates for borrowers who are borrowing more money. So the higher your loan amount generally the more competitive the interest rate will be. Each lender will have their own rate tier structure but as a general rule of thumb package discounts kick in when you are borrowing more than $150,000 with the size of the discount increasing in line with the size of your loan.
Loan to value ratio. The other factor that will determine the interest rate of a loan is the loan-to-value ratio or LVR. Some loans have LVR requirements of 80% and below to qualify for the most competitive rate. This means that you will need to have at least a 20% deposit or equity stake in the property to get the home loan. Some loans will allow you to borrow up to 95% but you may pay a higher interest rate and also be required to pay lenders mortgage insurance. See more about this here.
Variable rate versus fixed rate home loans, which is better?
Both fixed and variable rate home loans will have their pros and cons. As a borrower it is important not to try and 'time the market' but rather review all options carefully and choose one that is going to best suit your financial situation or comfort level. If you are nervous about the impact that a rate rise will have on your household budget then opt to fix some or all of the loan, if not, a variable loan might be more suitable.
The pros of a variable interest rate include:
lower repayments when interest rates are low
extra features like an offset account or extra repayments facility which can save you money over the life of your home loan
Fixed rate loans on the other hand make household budgeting easier as your repayments don't change over the term of the loan.
Borrowers also have the option with some lenders to split their home loan between a fixed and a variable rate. You can lock away a portion of your home loan to protect you if interest rates rise and you get to use the variable portion of your loan to put extra cash into the loan while rates are low which will save you thousands over the life of the loan. That's a win win.
How might rate changes affect my home loan?
When market interest rates drop, the variable interest rate charged on your home loan might also drop. And when market interest rates are up, your provider might hike your home loan interest rate up to match.
For example, if the Reserve Bank of Australia makes cuts to the official cash rate, your home loan provider may decide to pass on the full cut, or part of the cut to your home loan. It’s worth keeping in mind though, that there’s nothing to say lenders have to pass on official rate changes - it’s just recommended.
With this in mind, taking out a variable rate home loan does mean that you will have to prepare for possible increases in interest rates, but it also means that you could benefit from interest rate cuts that you might not benefit from if you were to take out a fixed interest rate home loan.
When is it a good idea to take out a full feature home loan?
The key reason to take out a full feature home loan is to benefit from more flexibility in how you make your repayments, which could also help you budget better and save on interest. Full feature home loans often include an offset account facility, free extra repayments and a free redraw service.
At a minimum, this type of home loan usually comes with a free redraw facility and free extra repayments. This combination is great because you can put every spare dollar towards your mortgage and shorten the life of your loan, while the redraw facility allows you to get those funds back if you really need them.
What is an offset account?
An offset account is a transaction account that is linked to your home loan. Having this type of account means you could pay less interest on your home loan. The funds in the transaction account are offset daily against the balance of your home loan and you are only charged interest on the difference between the two.
For example, if you have a home loan of $400,000, you’ve already paid off $80,000 and you have $200,000 in an account that is being 100% offset, you would only pay interest for $120,000 of your loan. This means that you would be paying less interest, as you are being charged interest on a smaller amount.
Where can I find great variable home loan rates?
One thing to keep in mind when searching for a competitive variable interest rate home loan, is that you will probably have a lot of options. Certainly more options than you may have had, say 10 years ago.
This is definitely a good thing, because it means you can be more choosy and you won’t be restricted to what the big four banks have to offer. These days you can take out a home loan with a credit union, an online bank, a neobank and even a dedicated online home loans lender.
An online bank or lender will often have a much more competitive interest rate to offer, as it has never had to deal with the overhead costs that come with having a physical branch.
Of course while a great price is worth chasing after, it is also good to make sure you’re getting all the features and flexibility you need for that price. So when you’re comparing home loans, make sure you’re comparing the whole package, price, features and flexibility.
How can Mozo help you find the right variable rate home loan?
Now that you've read up on all the things you'll need to consider when choosing a variable rate home loan now's the time to compare your options and this is where the tools on our site come in.
First up is the market snapshot table which lists some of the current top home loan deals available from a range of lenders. You'll find this at the top of this page.
If you want to delve deeper and compare all the home loans in our database - that's over 400 home loans - use our home loan search tool which will order results based on your requirements including things like variable interest rate, monthly repayments and fees.
If you are refinancing and looking to switch home lenders we also have a tool specifically designed for you. Our free online Switch & Save Calculator compares your existing home loan against the market and gives you a personalised report showing you which home loans will save you the most in interest and fees if you switch.
We also understand that choosing a home loan can be a confusing process even when you have all the tools to do it yourself, and you sometimes just want to speak with an expert.
You can call our home loan experts on 13 MOZO (6696) or send us an online enquiry and we'll call you back. Our home loan experts can help you with everything from understanding home loan jargon through to negotiating with the banks on your behalf for a better deal.
Another unique element of our site is that you can also read up on real customer experiences with our home loans ratings hub. We've got customer reviews of major banks, credit unions even online lenders like UBank and Loans.com.au. If you want the experts' opinion, head on over to our Experts Choice Home Loans Awards page for our top picks of the best value home loans in the market.
And for the number lovers out there we've got a range of home loan calculators that you can play around with until your heart's content. We can help you work out how much you can afford to borrow to how much your repayments could be depending on the term of the loan.
Finally, you can prepare for a rate rise with our rate change calculator, which will calculate your actual monthly repayments, should interest rates go up.
If you want more information to help you make an informed decision, head on over to our guides section.