A variable rate home loan lets your lender change your interest rate over time, so your repayments can go up or down. For many Tamworth borrowers, that flexibility is the main reason to choose one.
This guide explains how the loan works, what to weigh up and how to compare your options. It is general information only and does not take your personal situation into account.
What Is a Variable Rate Home Loan?
A variable rate home loan is a loan where the lender can adjust your interest rate at any time. Lenders often change it after the Reserve Bank moves the cash rate, but the decision is theirs, and the timing and size of a change can differ between lenders.
These loans often come with features that fixed loans limit or restrict. Common ones include extra repayments, redraw and a linked offset account. If you are still weighing up the broader range of home loan options, start there and come back to the rate type once you know what you need.
The main trade-off is certainty. Because the rate can rise, your repayments can too, and you need a budget with some room in it.
How Variable Rate Repayments Change When the Rate Moves
When the rate rises, your minimum repayment rises with it, and when it falls, your repayment can fall. The size of the change depends on your loan amount, your remaining term and the rate movement.
As an example, consider a Tamworth buyer with a $500,000 owner occupied home loan on principal and interest over 30 years. At an illustrative rate of 6.75% p.a., the monthly repayment is about $3,243. The buyer builds a buffer by testing a what-if rate of 7.00% p.a. At that rate, the repayment would be about $3,326, which is roughly $83 more each month.
The buyer decides that the extra amount fits comfortably within the budget and goes ahead with a variable loan. The point of the exercise was not to predict the rate. It was to confirm the loan stays affordable if the rate rises. You can run your own figures with a repayment calculator, and a broker can check how much a lender may be willing to lend through a borrowing capacity assessment.
Ready to get started?
Book a chat with a Mortgage Broker at Rome Mortgage Services today.
Offset Accounts and Extra Repayments: Where Variable Loans Shine
A linked offset account reduces the balance your interest is charged on, and extra repayments reduce your loan faster. Both are commonly available on variable loans, though conditions differ between lenders.
Take the same $500,000 loan at the illustrative 6.75% p.a. Suppose the borrower keeps $50,000 of savings in the offset account. Interest is then charged on about $450,000 instead of $500,000. Over a year, that is roughly $3,375 less interest, or about $281 a month, as long as the money stays in the account. The borrower can still reach the savings if needed, which suits people who want a cash cushion alongside the loan.
The trade-offs are worth checking. Loans with an offset account can carry an annual package fee or a higher rate than basic loans, so the saving only works if your offset balance is large enough to outweigh those costs. Ask each lender how extra repayments and redraw work before you decide.
Variable, Fixed or Split Rate: Which Suits You?
A variable rate suits borrowers who want flexibility and can handle repayment changes. A fixed rate suits those who want a set repayment for a set period, and a split loan divides the balance between the two.
Fixed loans give repayment certainty, but they usually limit extra repayments and can involve break costs if you leave early. A split loan lets you fix part of the balance for certainty while keeping the rest variable for extra repayments or an offset. The cost is some complexity, because you manage two loan accounts with different rules.
If you already have a fixed loan that is about to end, the fixed rate expiry page explains the choices you may face when it rolls over.
What to Compare Beyond the Headline Interest Rate
The headline rate is only one part of the cost, so compare fees, features and how the lender treats your deposit as well. A low advertised rate can be outweighed by ongoing fees or missing features.
Look at the following when you compare home loan products:
- Annual or package fees against the value of the features you will use
- Whether an offset account is available, and whether it is a full offset
- Any rate discount offered, and whether it applies for the whole term
- Redraw access and limits on extra repayments
- Whether Lenders Mortgage Insurance may apply, which depends on your deposit size and lender
If you are buying your first property, the first home buyers page covers how a broker can help you compare lenders before you apply. If you already have a loan, a review of your refinancing options may show whether your current rate and features still suit you.
If you are in Tamworth and want to know whether a variable rate suits you, call one of our team or book an appointment at a time that works for you. We will go through your goals, your budget and your options in plain language.
Frequently Asked Questions
Can my repayments change on a variable rate home loan?
Yes. Your lender can change the interest rate, so your minimum repayment can rise or fall. Testing your budget against a higher rate before you borrow helps you check the loan stays affordable.
What is an offset account on a variable loan?
A linked offset account holds your savings and reduces the loan balance that interest is charged on. In the illustrative example, $50,000 in offset on a $500,000 loan at 6.75% p.a. saves roughly $3,375 in interest a year while the money stays there.
What is a split loan?
A split loan divides your borrowing between a fixed portion and a variable portion. It gives some repayment certainty while keeping variable features on the rest, but you need to manage two accounts with different rules.
What should I compare besides the interest rate?
Compare ongoing fees, offset and redraw features, any rate discount and whether Lenders Mortgage Insurance may apply.
