WHAT IS A VARIABLE HOME LOAN?

by John Pierre Saliba, May 20, 2017

Variable home loans are popular among home buyers in Australia. The interest rate of this type of home loan changes according to the cash rate of the Reserve Bank of Australia (RBA). When the RBA cash rate declines, lenders charge their borrowers less by lowering the interest rate of variable home loans. When the RBA increases the cash rate, lenders charge their borrowers more by raising the rate of variable home loans.

Types of Variable Home Loan

There are two types of variable home loans: standard variable home loan and basic variable home loan.

Most home buyers in Australia opt for standard variable home loans, as they offer flexible features such as offset facilities, redraw money from the loan, extra repayments, as well as the ability for borrowers to split the loan. A 100% offset allows you to link your standard variable home loan to your everyday savings account, and use the money in your savings account to offset your loan balance. The more money you have in your savings account, the less interest you pay on your standard variable home loan. However, in order to take advantage of these flexible features, you usually have to pay a higher interest rate.

A basic variable home loan has a lower interest rate than a standard one. This type of home loan is perfect for first home buyers because it is cheaper and more straightforward. However, you may have to pay a high discharge fee if you want to close the loan in the first three years of the loan.

Pros and Cons of Variable Rate Home Loans

The monthly loan payment of a variable home loan changes according to the cash rate. This type of loan is flexible. You need to pay the minimum monthly payment, but you can pay more if you have more cash available. In a falling interest rate environment, you will benefit from the lower interest rates, as your monthly payment will be lowered.

However, due to the fluctuating interest rate of a variable home loan, it’s hard to budget for the monthly loan payment, especially if you have a tight budget. Also, in a rising interest rate environment, your monthly loan payment will rise.

If you’re not sure if a variable home loan is suitable for you, you should contact a home loan specialist or a Sydney mortgage broker who will assess your circumstances and recommend the right home loan to you.