Capped Variable Home Loan
We are often told ‘you can’t have it both ways’ or ‘you can’t have your cake and eat it too’ but with a capped variable home loan you can have as much cake anyway you want because you can enjoy the benefits of both fixed and variable interest rates, without the downsides of either. If this sounds too good to be true then it almost is because there are only two Australian lenders offering a capped variable home loan feature right now, but it is a feature to keep in mind because by the time you are ready to sign on the bottom line.
Features Of A Capped Variable Home Loan
A capped variable rate is a simple feature for you to understand for comparison purposes, and the complication comes for the lenders who need to be able to accurately calculate a capped rate which will ensure a positive return for them no matter what happens to interest rates. Features of a capped variable home loan include:
- A standard variable rate. A capped variable home loan is essentially one with a standard variable rate which can move up and down as your lenders standard variable rate is adjusted in line with the RBA’s decisions. However the difference is that in this case your interest rate will not rise above a certain amount, but it can still go down if official rates drop.
- You choose the capped period. Just as you can choose a fixed rate term on a fixed interest rate home loan you can also choose how long you want to cap your interest rate for. This means you can make a decision based on where you see your own financial situation to, or the movements which are predicted from official interest rates.
- You can enjoy the best of both worlds. With a capped variable home loan you can enjoy the flexibility of variable rates because you can benefit from rate decreases and at the same time you are enjoying the certainty of fixed rates because you will only be effected by rate rises up to a certain point.
How To Choose A Capped Variable Rate
Since this is a relatively new feature on the home loan market you will want to know as much as you can about the best way to compare capped variable interest rates and loan features. If you are considering a capped variable home loan:
- You only have two options to consider. BankWest and First Mac are the only two lenders currently offering capped variable interest rates on their home loan products. This is it doesn’t leave much scope for choice or comparison, but the same time you should disregard this unique feature just because it’s new and instead take the time to find out more about the other features BankWest and First Mac are offering with their capped rate.
- Consider the benefits in relation to a fixed rate. If the example you were considering a five-year fixed interest rate of 7.5% compared to a five-year capped interest rate of 7.7% while the capped rate is higher you also need to take into account the benefit you will get from the ability of your interest rate to drop if official rates drop, however if you were to choose the fixed rate which is initially lower you would not be able to take advantage when interest rates decrease.
- Consider your stress rate. Just as you would when you were considering a standard variable home loan, you should make sure to calculate what your repayments would be if your interest rate was to rise. Fitting in higher interest rates to your budget if you are considering a capped variable loan is just as important, but it is quite a bit easier because now you have a ceiling and you know the maximum amount you should use to calculate your stress rate.
Disadvantages of the Capped Variable Rate Loan
While the capped variable rate loans come with a wide range of advantages they do have some disadvantages. These disadvantages are:
- Limited choice. There are not many lenders that actually offer the capped interest rates loans anymore. Therefore, you will not have a great selection of loans to choose from if you are considering a home loan.
- Slightly higher interest rate. The capped interest rate loans will have a slightly higher interest rate than normal variable rate loans. While the interest rate will still be less than the fixed the capped rate will still cost you more than the variable rate loans. However, if the interest rates do not rise enough you will have received no benefit from capping.
When it comes to comparing home loans you may think the last thing you need is a new feature to think about. However when a feature comes along which he is able to combine only the good points of other home loan features, it is time to consider new offerings and new ways of doing things.
Related posts:
- Who is Suited to a Variable Rate Home Loan
- IMB Standard Variable Home Loan
- Firstmac Easy Livez – Capped Home Loan
- IMB Discount Variable Home Loan
- eChoice Standard Variable Rate Home Loans
- People’s Choice Credit Union Variable Home Loan
- Fixed Versus Variable Rate – Which one to Choose?
- ANZ Three Year Fixed Rate Home Loan
- 10 year fixed rate home loan
- PMG Standard Variable/Fixed Home Loan
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