Take advantage of a home loan with a flexible interest rate
A variable rate home loan is one of the most common types of home loans in Australia, and is also one of the most competitive products for lenders.
A variable rate home loan is a home loan product which has an interest rate which fluctuates up or down over time as your lender sees fit. Unlike a fixed rate home loan where the rate is locked in for a fixed term, the interest rate of a variable rate mortgage moves up and down in accordance with market changes.
UBank UHomeLoan Variable Rate - Standard Variable Rate Value Offer (Owner Occupier P&I)
Variable Rate Home Loan Offer
Apply for the UBank UHomeLoan Variable Rate and get a low rate plus no upfront or ongoing fees as well as unlimited redraws.
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Rates last updated July 29th, 2016.
- IMB Budget Home Loan - LVR <80% (Owner Occupier)
Advertised rate decreased to 3.99%
April 6th, 2016
- Bank of Queensland Clear Path Variable Rate Home Loan - Discount rate ($150k to less than $500k Owner Occupier)
Interest rate increased by 4.19%
April 15th, 2016
- loans.com.au Essentials - Variable (Owner Occupier)
Interest rate decreased by 0.25%
May 5th, 2016
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What is a variable rate home loan?
A variable rate home loan has an interest rate which can fluctuate as your lender responds to economic factors such as the cost of funding, the Reserve Bank of Australia's official cash rate decisions each month and more.
This means over the course of a year, your home loan rate (and your periodic repayments) might increase or decrease. In Australian history, variable interest rates have seen highs of around 17%, and lows around 3%.
Variable rate home loans contrast with fixed rate home loans, where you enter into an agreement with your lender for a predetermined period of time, usually between one to five years, during which your interest rate won't change.
There are also mixtures of variable rate and fixed rate home loans known as split rate loans, and these allow you to split your home loan into two or more portions and allocate variable or fixed rates to each portion.
Pros and cons of a variable rate home loan
In general, variable rate home loans have advantages and disadvantages you should be aware of.
- Features. Many variable rate home loans come with useful features, such as the ability to make additional repayments, offset accounts and redraw facilities. These features are not offered in abundance with fixed-rate loans.
- Easy to refinance. When you opt for a variable rate loan, you have the flexibility to refinance with another lender in order to secure a more competitive deal. With a fixed rate product, however, you would need to pay high discharge fees to exit the loan early.
- Falling interest rates. A variable rate home loan provides you with the ability to benefit from falling interest rates, which are typically passed on to variable rate customers. Even a 0.25% rate reduction could make a big difference to your periodic repayments.
- Interest rate rise. An interest rate rise on a variable rate home loan would make your repayments more expensive, and could make it more difficult to service your loan.
- Difficult to budget. If your rate is fluctuating regularly, it can be difficult to plan an accurate budget. You might have less money to allocate to other expenses if your home loan repayment rises.
How do you compare variable rate loans?
Comparing a variable rate home loan should take into account a range of factors, including:
- Interest rate. Interest rates will impact your repayments, so ensure you choose an interest rate which will result in a repayment you can manage. It's also a good idea to use a repayment calculator to find out what your repayments will look like with the given interest rate, and also add an extra 1% on top of this to see what your repayments would be should interest rates rise. This will help you prepare and manage your interest rate risk.
- Fees. A variable rate home loan can come with a range of fees, including upfront application fees or ongoing fees, as well as fees to use features including offset accounts or redraw facilities. Ensure that the fees justify the interest rate and features you'll receive with the loan. This is why you should always pay attention to a loan's comparison rate, which takes into account its interest rate and fees and expresses them as a percentage.
- Features. What features you choose to add to your comparison will depend on how you want to use your home loan. If you prefer to have your salary paid into your home loan to minimise your interest charged, you might want to look for an offset account. If you want a home loan that allows you to make unlimited additional repayments, you might want to look for home loans with a free redraw facility.
- Eligibility. Different lenders will put limitations on what types of properties they will finance and the types of borrowers they will accept. Ensure the loans you're comparing are available for your situation, including the type and size of the property, your income source and your loan purpose.
Types of variable rate home loans
There are a number of variable rate home loans on offer. These include:
- Variable rate full featured home loans. Full feature home loans offer a range of extras and useful features, including 100% offset accounts, redraw facilities and more.
- Variable rate package home loans. Package home loans offer discounted interest rate and fees in return for bundling your credit card, savings accounts and other financial products with your home loan lender. They generally also charge an annual fee, unlike other variable rate home loans.
- Low doc variable rate home loans. Low doc variable rate home loans suit those who are self-employed or otherwise aren't able to satisfy the usual income evidence requirements lenders set. Low doc home loans can come with a range of features like regular variable rate home loans.
- Variable rate bad credit home loans. Lenders that offer bad credit home loans have more flexible credit history requirements, and can be applied for by discharged bankrupts or those with paid and unpaid defaults. These will usually have higher fees and rates depending on the severity of your credit score.
- Introductory rate home loans. Introductory rate home loans are variable rate home loans with a special discounted rate which usually applies for the first year, after which a regular variable rate applies. These can be suited to first home buyers or others trying to minimise interest costs in the first year. An introductory loan can offer a discount off the standard variable interest rate for an introductory period. For example, if your lender's standard variable rate is 5% and your introductory discount is 0.5% then you will save 0.5% for the entire introductory period, so if your lender raises their rates to 5.25% you will pay 4.75% and if their rates go down to 4.50% you will pay just 4% interest.
- Basic variable rate home loans. A basic variable rate home loan does away with some features offered on the home loans above, such as 100% offset accounts, but in return offers lower interest rates and fees. You can read more about them below.
Things to consider when comparing a variable rate home loan
Keep in mind that while a variable rate home loan can come with a large range of features and is readily available at a wide variety of lenders, there's a chance your rate could decrease or increase over the course of your loan term.
As a result, a variable rate home loan comes with a degree of risk so it's important to review your risk tolerance and your lifestyle needs.
For instance, if you're a young family or you're nearing retirement age, you may want the peace of mind and security offered by a fixed rate home loan.
Frequently asked questions about variable rate home loans
What's the difference between making principal and interest repayments and interest-only repayments?
Your principal is the loan amount you borrow. This is the amount on which your bank will charge you interest. Principal and interest repayments are regular repayments in which some of your repayment goes towards your principal, and some goes towards the interest due for that month. Interest-only repayments are simply repayments where only the interest portion is paid off, meaning they are usually smaller than principal and interest repayments, but also will not see your loan paid off.
What's a 100% offset account?
An offset account is a transaction account which is attached to your home loan. Any funds in the account are used to offset the interest you're charged. For example, if you place $10,000 in your offset account, and you have a loan amount of $150,000, your interest will be calculated on a loan amount of $140,000 rather than $150,000. Offset accounts usually give you complete access to your funds like any other transaction account.
What is a redraw facility?
A redraw facility is a way you can withdraw any extra repayments you've made on your home loan. Redraws are generally offered over the phone or online, and can sometimes attract a fee, and minimum redraw amounts.
What's the difference between a bank and credit union?
Banks and credit unions are both financial institutions which offer products such as home loans, personal loans, credit cards and more. The major difference is that a bank is owned by shareholders (for-profit), while a credit union is owned by its members (non-profit).
How much deposit will I need to buy a home?
What happens if I pay my loan off early?
As always, this will depend on your home loan, so if you think you'll be paying it off early you might want to read the terms and conditions before applying. In many cases, variable rate home loans will charge a discharge fee of between $150 - $400 to exit your home loan if you pay it off early.