Variable-rate home loans: The pros and cons
See if this loan option could be the right fit for you.
Variable rate home loans simply refer to home loans whose rate is determined by interest rates. However, there are in fact a range of different variable loans offered by lenders. We have listed some of the most common types below:
A variable-rate home loan is the most common type of home loan in Australia. The rate of your home loan is more or less determined by changes in market interest rates, so your loan repayments will fluctuate depending on the official cash rate. Here, we’ve outlined the types of variable home loans, the pros and cons, and whether a variable-rate or fixed-rate mortgage could be the right option for you.
Types of variable home loans
There are actually a few types of variable-rate home loans on the market, each with different parameters.
Basic variable home loans
This loan type has limited features, but in return, borrowers receive lower rates and fees. This is basically a ‘no frills’ version of the variable home loan.
Variable-rate full-featured home loans
As the name suggests, this is the opposite to a basic variable home loan. These loans offer a full range of features and extras, such as an offset account and redraw capabilities.
Variable-rate bad-credit home loans
These loans are offered to borrowers with bad credit scores and usually incur higher fees and rates. Borrowers will likely be charged with Lenders Mortgage Insurance (LMI) with this loan.
Variable-rate package home loans
Package loans are available to borrowers who bundle their financial products under the same lender, such as your credit card and savings account. In return, these loans offer discounted interest rates and fees.
Pros of a variable-rate home loan
No exit fees
Unlike fixed-term loans, you won’t be charged fees if you want to exit your loan before the specified end date. This makes it much easier to refinance and secure either a more competitive rate or unlock equity in your home.
Take advantage of decreasing interest rates
If interest rates fall, having a variable-rate home loan will make it easier to service your loan as your repayments will also decrease. This can also give you the opportunity to pay back slightly more as you’re saving on interest.
Added features and flexibility
Offset accounts, redraw facilities, and early or additional repayments are just a few of the beneficial features of variable-rate home loans.
Cons of a variable-rate home loan
It’s difficult to forecast what will happen with interest rates, and regular fluctuations mean that your repayment amount will always change. This makes it harder to budget repayments over the long-term.
Interest rate rises
If interest rates rise, you’ll immediately feel the impact. Given the size of your home loan, even a slight increase in interest rates can make your repayments far more expensive than what you can afford to pay back.
READ MORE: Do you know what a Comparison Rate is?
Is it better to get a fixed or variable-rate mortgage?
Deciding which home loan to choose can be tricky, especially when it comes to the stability of a fixed-rate or the flexibility of a variable-rate home loan.
Variable rates have traditionally been attractive due to their initially low rate — but how do you know if that rate will remain low? Banks have significant control in the setting of loan rates, and there is little transparency surrounding how these rates are calculated.
You do have the option to choose a split loan, where one part of your loan is variable-rate and the other is fixed-rate. This is a great way to get the best out of both loan types with less risk.
If you want to find the best variable-rate home loan, why not try Joust. We remove the confusion and provide unrivalled transparency, which makes the decision process much clearer for you.
We bring the banks to you with their best offer, providing a marketplace where you and the banks are able to see other offerings. This process is what makes Joust the simplest and most competitive platform to use when shopping for your mortgage.
Ready to find the best home loan rate for your needs? See how Joust can help here.