Basic Variable Rate Home Loan

What is a basic variable rate home loan?

A basic variable home loan is essentially a "no-frills" home loan that doesn't offer any additional bells and whistles. In return for opting for this basic product, most banks and lenders offer basic variable home loans to customers at discounted interest rates and they charge lower fees. The interest rate itself is still a variable rate, so it's subject to move up and down in line with fluctuations in the market. However, lenders will usually offer a set discount below their standard variable rate.

Competition between banks is quite fierce, so basic variable home loans often feature some of the cheapest interest rates on the market. Still, the best loan isn't always the one with the lowest rate, so the key to choosing the right loan is to compare its features and look into how they might help you achieve your financial goals now and in the future.

What are the features of a basic variable rate home loan?

Basic variable loans don't come with all the additions of a full-featured loan, but more often than not, these loans are more than just an interest rate and repayment date. Common value adding features of basic variable rate home loans include:

• A cheap interest rate: The most prominent feature of a basic variable home loan is the cheaper interest rate. This is often significantly lower than the standard variable rate offered.
• Additional repayments: You are usually able to make additional repayments off a basic variable rate mortgage at any time, in most instances without incurring a charge.
• Redraw facility: A redraw allows you to withdraw any extra payments you've made on top of the normal repayment amounts if you need the cash.
• Lump sum payments: If you have a large sum of money, you are generally able to deposit this into your basic variable mortgage account without penalty.
• No account-keeping fees: Most basic variable loans don't have monthly account-keeping fees charged on your loan account.
• No early repayment fees: If you repay your mortgage early, by selling your home or refinancing to another lender for example, you shouldn't be charged any early repayment fees.
• Construction option: Many basic variable loans offer a construction loan option, including progress draws to your builder.
• Interest-only: Instead of making full principal and interest payments, some basic variable rate loans may allow you to make interest-only payments. This is a popular loan with investors.
• Top up: You are able to 'top-up' or increase your original mortgage amount if you need more money.

How to compare basic variable home loans

When you're comparing basic variable home loans, don't be tempted to jump at the one that has the lowest advertised interest rate. There are some other things you need to consider in order to compare your options accurately. These include:

• Redraw limitations: Some lenders will impose limitations on the redraw facilities attached to their basic variable home loans. These include setting a minimum amount you're able to redraw, or charging a fee each time you access the redraw facility. Always check whether these restrictions apply.
• Set-up fees: While the cheap interest rate you see up front might look attractive, always check what other fees will apply to your loan. Establishment fees, application fees, valuation fees, documentation fees, legal fees, settlement fees, and any ongoing monthly fees are common among most loans.
• Comparison rates: Always ask to see the comparison rates for any basic variable mortgage you're considering. The comparison rate adds together the interest rate, plus any setup fees and ongoing fees. This figure is then expressed as a percentage. It shows you exactly how much the loan will cost you, which may be slightly different to the advertised interest rate you see. If it is considerably higher, you know you're paying extra fees and costs on top of your interest payments somewhere. Ideally, the comparison rate should be calculated based on your own mortgage amount and your loan term to ensure you're getting a proper comparison. It will also help to ensure you really are getting the cheapest interest rates you can find overall.
• Comparison shopping: While the comparison rate is a good guide, you also need to weigh the loan's features against its true cost. If you really do believe you'll need access to a redraw facility in the future, you will need to factor this in when making a decision about the loan that is right for you.
• Customer service. This is a more difficult loan aspect to compare, but you should take into account a lender's customer service. Ask friends or family if they've had experience with the lender, or look for customer reviews of the lender on independent review websites. If you call the lender, ask them if you'll be dealing with one service representative throughout the whole experience or if they'll change. Also ask about the types of ways you can contact them, and how you can leave feedback and complaints.

What do I need to apply for a basic variable home loan?

In order to apply for a basic variable home loan, you will need to provide your lender with the following information:

Identification

All new home loan applications will require that you provide identification to prove who you are. Suitable documents might include:

Income verification

You'll need to supply a couple of recent payslips, plus a PAYG payment summary or a tax assessment notice to verify your income. If you have other income coming into the household, you'll need to verify this too. This might include Family Allowance payments, child support payments, dividend income or rental income.

If you're self-employed, you will need to provide two full financial years' worth of financial statements. Some banks may require you to also supply Business Activity Statements (BAS) if your application is lodged after December, as this is often six months after the last financial statement was prepared.

Assets and liabilities

The application form for your basic variable home loan will ask for information about your current assets and liabilities. You will need to know the approximate values of your assets, including real estate, cars, amounts in savings accounts, and superannuation. You'll also need to provide outstanding balance amounts for any debts you currently have.

Current repayments

All lenders will want to know what your current repayment obligations are. You will need to know how much you pay each month on any outstanding loans, credit cards, store cards or any other debts you have.

Refinancing

If you're refinancing your existing mortgage from your current lender to a new lender, you'll usually need to supply 12 months of statements for your current home loan. This shows the lender if you've been diligent about making your repayments on time. If you're including any debt consolidation amounts into your refinance, you'll also need to provide statements for any accounts that are being consolidated, such as credit card statements or personal loan statements.

Deposit amount

If you are not using existing equity in your home to secure your mortgage, you'll need to provide evidence of where your deposit is coming from. This will mean providing bank statements for your savings account showing that you have been maintaining a regular savings plan.

Contract of sale

If you're purchasing a home, you will need to provide a signed, fully executed contract of sale along with your application.

Tips for managing a basic variable rate home loan

Managing a basic variable home loan should be relatively easy but there are always things to research and consider before you submit your application. Here are some simple tips to help you get started on the right track.

Interest rate

While you might have been attracted to a particular loan because of the interest rate, it's always worth checking whether the discount applied to the basic variable rate is a set amount below whatever the standard variable rate is. For example: some lenders will guarantee that their basic mortgage will always be 0.7% below their standard variable rate, so if rates move up or down you'll know your rate will move up or down at the same increments. Other lenders won't guarantee the discounted amount, which can mean that even if the standard variable rate is reduced by 0.25%, your basic variable loan might only reduce by 0.2%.

Repayments

Most lenders will allow you to set up direct debit payments from your regular transaction account for your payments to be taken out of. You should also be able to choose your payment frequency, so your payments can be set so they're made weekly, fortnightly or monthly. There are also some lenders that will let you set up your payments so they're made by salary crediting. This is where your payroll officer at work pays a portion of your salary directly into your home loan account, while the rest goes into your normal transaction account.

Additional repayments

Most lenders will give you various options for making extra payments on your mortgage. You can usually elect to pay more than the minimum payment amount as part of your regular repayment. If you wish to just pay extra money when it suits your budget, you should be able to transfer funds electronically from your transaction account or savings account straight into your home loan account.

Linking other accounts

Your basic variable home loan might not be with the same bank as your regular transaction account. If you ever wish to redraw any extra payments you make on the loan, you will need to nominate an account for the money to be transferred to. Always check that you can link a transaction account to your home loan account for this reason.

Redraw facility

Even though most basic mortgages feature a redraw facility, it always pays to check any conditions that will apply. For example, some lenders may not allow you to redraw your additional repayments unless you withdraw a minimum of $500 or $1,000. Other lenders may charge you a redraw fee each time you use this facility.

How do I manage a basic variable home loan?

The majority of lenders offer several ways to manage a basic variable home loan. These include:

Pros and cons of a basic variable rate home loan

There are plenty of benefits to choosing a cheap basic variable rate home loan, but you'll also find there are some disadvantages too.

FAQ

• Should I make extra repayments?

  Any extra repayments you do make on a basic variable home loan will actively reduce your outstanding balance. As the interest charged on your mortgage is calculated daily on your balance, this can reduce the amount of interest you pay overall. You'll be saving money on interest charges and reducing the term of your loan.

• Should I fix my interest rate?

  A fixed rate home loan works differently to a variable rate home loan. While your loan's interest rate is fixed, your repayments won't change.

  During the fixed rate term, you may be limited to the number of extra payments you're able to make before you're charged penalties. You may also find that steep break fees apply if you break out of your fixed rate term before it has expired, such as refinancing or selling your home. Many fixed rate home loans also won't allow you to redraw any additional payments you've made.