Are you looking for a flexible home loan with low fees, an extra repayments facility and the ability to redraw on that cash? Then a variable rate home loan could be just the ticket.
But that doesn't mean there aren't some catches to watch out for. So to help you navigate the wondrous world of variable home loan rates in Australia we've created this quick cheat sheet.
Are you a first home buyer? We also have a great range of articles, tips and tools designed specifically with first timers in mind. So head on over to our dedicated first home buyers hub for everything you need to know about purchasing your first home and getting your first home loan like a pro.
Are there different types of variable rate home loans?
The great news is that as a borrower you've got a lot of choice when it comes to variable rate home loans as these are the most popular loan type in Australia. Most banks, credit unions and online lenders will have a number of different variable home loan products to choose from.
Options may include:
Introductory rate home loan. Sometimes called “honeymoon” rate loans, these offer a low variable rate for an initial set period (usually 1 - 3 years) which reverts to the loan’s standard variable rate once the introductory period ends. If you’re considering one of these loans be sure to check that the revert rate is competitive as you don’t want to end up paying more than you should be after the introductory rate ends.
Basic home loan. Like the name suggests, you’ll get little in the way of features in return for a lower interest rate than a full feature loan. If you don’t need bells and whistles like an offset account or unlimited free extra repayments then a basic home loan could be a good money saving option.
Full feature loan. A full feature home loan is a loan that has flexible features and other bells and whistles like an offset account facility, free extra repayments and free redraw. You might pay an annual or monthly service fee for a full feature home loan but the extra fees can be worth it for the added flexibility and benefit of using an offset account to reduce your interest.
Variable rate package. If you’re borrowing over $150,000 you may qualify for a packaged home loan, where you get a lower interest rate if you bundle other products like a credit card and bank account with your home loan provider. You will generally pay an annual package fee for this type of loan but the rate discounts can be substantial, especially if you are borrowing a large amount of money.
Standard variable rate. This usually refers to a 'reference rate' that the provider uses to calculate margins for the rates applied to the rest of their variable rate loan options. Standard Variable rates are not restricted by LVR or loan amount. They should have all of the flexibility options offered by the provider including offset account, loan portability and the ability to split between fixed and variable.
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.
What to look for in a variable rate home loan?
Every home loan will have its pros and cons. The challenge for every borrower is to decide on which option will best suit your financial situation and your lifestyle. Look for:
Competitive interest rate. Your interest rate will determine how much your repayments will be each month so you will want to put time and effort into finding a home loan with a competitive rate. Don't be swayed by low headline or honeymoon rates - be sure to also review the comparison rate which takes into account revert rates and fees over the life of the loan.
Flexible features. One of the top reasons for choosing a variable rate home loan over a fixed rate home loan is the features that can help you to minimise the cost of your loan. Having an offset account or making extra repayments without penalties will save you money but only if you use them. Don't pay for features you will never use.
Low fees. There are upfront fees that you will be required to pay when you take out the home loan like an application or valuation fee and there are ongoing fees which might be charged monthly or annually. It's important to weigh up the cost of these in relation to the interest rate you will pay on your loan. Sometimes, you are better off to pay a small ongoing fee to get a lower interest rate than to pay no fee and have a higher rate.
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 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.