Variable Rate Home Loans Comparison

What is a Variable Rate Loan?

A variable rate home loan is a very popular product in the Australian lending market and as such, a very competitive product amongst lenders. If you are suited to the flexibility of a variable interest rate and can benefit from the features which come with a variable rate home loan, you can select from a wide range of home loans from after comparing the lenders vying for your business.

Standard Variable Rate Loans

Benefits of a Variable Rate Home Loan

Even though a variable rate home loan is one of the most popular loans available you still need to make your own comparisons of the features and benefits to make sure that they suit you. A variable rate home loans are notoriously feature packed, but you will only benefit from such inclusive features if you will use them regularly and to the full extent they are intended for otherwise you could be paying more fees for features you don't need. Consider whether the benefits of a variable rate home loan will help you manage your mortgage:

• Your home loan interest rate is likely to fall when official rates drop. A variable home loan interest rate allows you to take advantage of falling interest rates when the Reserve Bank decides to drop their official rates. With a fixed-rate home loan rates remain unchanged regardless of movements by the RBA.
• You are getting a very feature packed loan. Variable-rate home loan will often have inclusions such as a 100% offset account, free additional repayments and redraw facilities, and even a line of credit option so you can take advantage of equity you have built in your home.
• Variable rates are often still lower than fixed rates. Currently the average variable rate is between 0.5% and 1% lower than most fixed rates. This means you can be getting a better deal on a variable interest rate and at the same time you can benefit from falling rates.
• You can choose to cap your variable-rate. Several Australian lenders have introduced a variable rate home loan where you can choose to cap your rate so that it does not rise above a certain amount but you can still benefit if the rate decreases. You can choose capped variable home loans for a term which suits you and capping at a slightly higher rate can often be more beneficial than choosing a fixed-rate which is slightly lower initially.

How To Use A Variable Rate Home Loan

As with any home loan product you need to make sure you understand all of the features of a variable-rate home loan so you can make sure the loan, your savings and your repayments are all working hard for you. To maximise the benefits of a variable-rate home loan:

• Make the most of all the extra features. When you paid a higher application fee or you paid to add a professional package with additional features to your variable home loan, you are paying for the features added into your loan somewhere. Therefore make sure that you are able to use all of those extra features to their full potential so that you enjoy the full benefits of having a feature packed variable-rate home loan.

• Budget for variations in your interest rate. Just as you can take advantage of falling interest rates, you also need to be prepared for rising rates as well. Therefore when you are preparing a home loan budget, budget for an increase in your interest rate of at least 2%, as this is not only the stress rate which lender will use to determine your eligibility, it can give you a good idea of just how much your repayments can change from a seemingly small rate rise.
• Don't be tempted to fix. If you shop around you can often find a variable interest rate home loan with a lower rate than those offered on fixed-rate terms. Plus by the time interest rates become unbearable and you are thinking about fixing your variable-rate, rates are probably about to drop anyway so fixing at the height of an interest-rate cycle is actually going to cost you money because you are locking in a higher fixed rate.

Introductory home loans are often also called honeymoon home loans because they are very popular with first home buyers who have saved hard for their deposit and other home loan costs, and need a little more room in their budget while they rebuild their savings. Anyone can benefit from an introductory variable rate though, even if you are a second home buyer, refinancing or investing.

An introductory variable interest rate will be applied to an introductory home loan for a set period of time. This introductory period could last for anywhere from six months to three years. At the end of the introductory period, your home loan interest rate reverts to the lender's standard variable interest rate for your loan type.

There are two ways a variable interest rate may be discounted in the first months or years of your loan:

1. A set discount. An introductory loan can offer a discount of the standard variable interest rate for an introductory period. For example, if your lender's standard variable rate is 7% 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 7.25% you will pay 6.75% and if their rates go down to 6.50% you will pay just 6% interest.
2. A set discounted rate. An introductory variable rate can also be in the form of an ongoing lower interest rate which is set at 6% for example, where the lender's standard variable rate is 7%. However, in this instance the discount can be diminished if the lender lowers their interest rates because where you were saving 1% if the lender drops their rates to 6.75% you are only saving a quarter of a percent. At the same time, your repayments are fixed for the introductory period, which can also be helpful when you are just starting out.

With any introductory variable interest rate it is important to remember to not only compare the discounted rates, but also the revert rates as this is the interest rate you will be paying for the majority of your home loan's life.

What are the benefits of introductory variable rates?

Securing a discounted interest rate is always a benefit, but you also want to make sure you will be able to make the most of the advantages of an introductory variable interest rate home loan, to ensure this is the right loan choice for you.

Therefore, consider whether you could benefit from:

• An ongoing introductory low interest rate. With an introductory variable interest rate you will remain several steps ahead of official interest rates in the first few months or years of your loan. This can influence your choice of loan, because you may be worried about interest rate rises, but not ready to lock into a fixed rate loan, but with an introductory variable rate, you don't have to.
• An introduction to loan repayments. If you are a first home buyer, mortgage repayments can come as a big shock to your budget. Even if you are buying a second home or refinancing, you may be borrowing more money, and therefore looking at higher repayments. However, an introductory variable rate will allow you to introduce a lower loan repayment into your budget, adjust to that, and then find that little bit more room for your regular repayments, rather than being shocked in full repayments from the beginning.
• Some of the lowest interest rates available. Introductory variable rates are becoming a very competitive loan product and as a result are some of the lowest available on any loan type.
• More funds for new home costs. When you buy a new home there are more costs than just repayments, loan fees and stamp duty to worry about. There are moving costs, the cost of new furniture and of course paying for the house warming party. With a lower introductory variable rate on your home loan, you can free up cash for these new home costs.
• Can choose flexible repayment options. An introductory variable rate can be applied to various types of loans, so if you shop around you can find a loan with additional repayment and redraw facilities, and even an offset account to save you even more.

What are the pitfalls of an introductory variable rate?

As with any loan product, if you use an introductory variable rate loan outside of its intended parameters you can be penalised. Therefore, make sure you can avoid pitfalls such as:

• Higher exit fees. Lenders are able to offer lower introductory rates because they know they will be getting their costs back from you in interest and fees over the life of the loan. Therefore, if you choose to exit your introductory variable rate loan during the introductory period, or even within the first few years after the introductory period has ended, you can be faced with high exit fees.
• Some limited features. Make sure your introductory home loan has all of the features you want and need in a loan, as some may limit the number or value of additional repayments which can be made during the introductory period.
• High standard variable rate. When comparing introductory variable rates, be sure to compare the lender's standard rates too because you could be faced with much higher repayments than expected when your introductory rate reverts to the standard rate.

How can you find ongoing lower interest rates on your home loan?

If you are not suited to an introductory variable rate loan because you need a low doc loan because you are self employed, or you are building your own home and need a construction loan, then you may be able to take advantage of other loan features which help you attract a lower interest rate.

Introductory variable rate home loans can also be found with some or all of these features, so you can continue to save on interest with:

• An offset account. An offset account is a transaction account which is linked to your home loan account and the balance of the offset account reduces the amount of your loan which attracts interest. For example, if you have a $250,000 home loan and you have $10,000 in your offset account, you pay interest on just $240,000. This then means your monthly repayments are lower as they are made up of less interest, so if you continue to make the same monthly repayment, the extra amount will come directly from your principal loan amount, and you can repay your loan sooner, because you pay less interest.
• A professional package discount. Many lenders will offer a discounted interest rate as part of a professional package if you borrow over a certain amount. The discount often increases the more you borrow and can be an ongoing interest rate discount for the life of the loan, up to 0.7%.
• A basic home loan. A basic home loan is one without any additional features or products attached. As such, this simple loan product charges the lowest interest rate of any loan product, often up to 2% lower than a standard variable interest rate loan.

If you are able to find room in your budget for possible rate rises, and you have the diligence to maintain higher home loan repayments to get ahead when rates are low then you could benefit from a variable-rate home loan.

Basic Variable Rate Home Loans

What is a Basic Variable Loan

A basic home loan is a specific home loan that is offered by many providers. The basic home loans are:

• Basic variable loan. The basic home loans are loans that will help you save money. The interest rate that is offered with the basic home loans will be a variable rate that will change over time.
• Who is suited to a basic variable loan. Many people will be suited to the basic variable loan. However, the basic variable loan will mainly suit people who are looking for a cheap loan that does not require them to play around with other features to help them save money.

Features of the Basic Variable loan.

The basic variable loans come with a variety of features. The features offered with the basic variable loans are:

• Low interest rate. The main feature of the basic variable rate home loans is the lowest rate. The interest rate that is offered with the basic variable rate loans will usually be the lowest that are offered of any product offered by a provider.
• Low fees. The basic variable loans will generally have no ongoing fees that are charged to the loan account. This can save you a lot of money over the course of the loan.
• Fewer features. One of the disadvantages of a basic variable loan is that the loan will often come with few features. While many people will not use any of the features that may be offered with loans people in the right situation may be able to save a lot of money by getting a loan with features.
• What you should ask for. If you are getting a basic variable loan you should be sure that you get one that allows you to make additional repayments. By making additional repayments when you can you will be able to save a lot of money on interest.

Downsides of the Basic Variable Loans

While the basic variable loans have a lot of upside they do have some disadvantages. The downside of a basic variable home loan will be:

• Interest rates are vulnerable. The interest rates that are offered with the basic variable loans are great. However, if the rates are risen by the reserve bank then the rates on the basic loans will generally always go up.
• Fewer features means less flexibility. While the basic variable home loans are great they do lack features. The lack of features usually translates to less flexibility in the loan. If you are looking for a loan with a bit more flexibility then you are probably better looking elsewhere.

Basic variable loans are great home loans for people that would just like to repay their home loan as they see fit. People who get a basic variable rate home loan are people that just want to pay off the home loan, get the best rates and not worry about any of the features that may come with loans. The basic variable home loans will always some with the lowest interest rate offered by the provider.