Variable Rate Home Loans and Why They Matter

When you're looking to achieve home ownership or invest in property, understanding the different home loan products available is essential for your financial stability. Variable rate home loans are one of the most popular home loan options in Australia, offering flexibility and potential advantages that suit many borrowers' circumstances.

A variable interest rate means your home loan interest rate can change over the life of your loan. When the Reserve Bank of Australia adjusts the official cash rate, or when lenders make their own pricing decisions, your variable home loan rates may rise or fall accordingly. This directly impacts your loan amount repayments and the overall cost of your mortgage.

Understanding Variable Interest Rate Home Loans

Variable rate home loans offer several home loan features that distinguish them from fixed interest rate home loan products. Unlike a fixed rate where your interest rate remains unchanged for a set period, variable rates fluctuate based on market conditions and lender policies.

The key characteristics of variable rate loans include:

• Flexibility to make additional repayments without penalty
• Access to features like offset account options
• Potential to benefit when interest rates decrease
• Ability to refinance without break costs
• Options for both owner occupied home loan and investment purposes

When you apply for a home loan with a variable rate, you're choosing adaptability over certainty. This means you need to budget for potential increases in your repayments, but you also stand to gain when rates drop.

Variable Rate Home Loan Features and Benefits

One of the primary home loan benefits of choosing a variable rate is access to additional features that can help you build equity faster. Many variable home loan packages include:

Offset Account: A linked offset account operates like a transaction account, but the balance reduces the interest charged on your home loan. For example, if you have a $400,000 loan amount and $20,000 in your mortgage offset account, you only pay interest on $380,000.

Redraw Facility: Make extra repayments to reduce your principal faster, then access these funds if needed. This helps improve borrowing capacity for future lending needs while reducing interest costs.

Portable Loan Options: Some variable rate products are portable, meaning you can transfer your existing home loan to a new property without reapplying or paying discharge fees.

Split Rate Flexibility: Many lenders allow you to combine variable and fixed portions in a split loan arrangement, giving you both stability and flexibility.

Comparing Variable Rates Across Lenders

When you compare rates and home loan packages, you'll notice significant differences between lenders. Current home loan rates can vary by several percentage points, which translates to thousands of dollars over the life of your loan.

At Empire Road Investments, we access home loan options from banks and lenders across Australia, helping you find products that match your circumstances. Our home loan rates comparison service examines:

1. Advertised variable interest rates
2. Available interest rate discounts
3. Ongoing fees and charges
4. Home loan features included in each package
5. Loan to value ratio (LVR) requirements

A lower LVR typically means you'll receive better rate discounts. If your LVR is above 80%, you may need to pay Lenders Mortgage Insurance (LMI), which protects the lender if you default on your loan.

Variable Rate vs Fixed Rate Considerations

Choosing between variable and fixed interest rate options depends on your personal circumstances, risk tolerance, and financial goals. Variable rates typically offer:

• More flexibility for extra repayments
• Access to features like offset accounts
• Potential savings when rates fall
• Lower break costs if you need to refinance

Fixed rates provide certainty with your repayments, which helps with budgeting, particularly if you need lower repayments or have tight cash flow. However, you'll miss out on rate decreases and face restrictions on additional repayments.

Many borrowers choose a split rate approach, combining both variable and fixed portions. This strategy provides some protection against rate rises while maintaining flexibility.

Interest Only vs Principal and Interest

Variable rate home loans are available for both interest only and principal and interest repayment structures. With interest only loans, you pay only the interest charges for a set period (typically 1-5 years), which results in lower initial repayments but doesn't build equity in your property.

Principal and interest repayments reduce your loan balance over time, helping you build equity and secure your financial future. This approach costs more initially but means you're progressively owning more of your property.

Calculating Home Loan Repayments

Calculating home loan repayments on a variable rate requires considering that your payments will change when rates move. Your repayments depend on:

• Your loan amount
• The current interest rate
• Your loan term (typically 25-30 years)
• Whether you're paying principal and interest or interest only

A mortgage broker can help you understand how rate changes might affect your budget and whether you can manage potential increases in your repayments.

Home Loan Pre-Approval and Application

Before you start property hunting, obtaining Home Loan pre-approval gives you confidence about your borrowing capacity. The home loan application process for variable rate loans typically involves:

1. Providing proof of income and employment
2. Disclosing your assets and liabilities
3. Demonstrating your savings history
4. Meeting the lender's serviceability requirements
5. Providing identification documents

Whether you're seeking your first home loan or you're an experienced property investor, having professional guidance throughout your application ensures you access suitable home loan products for your situation.

Making Your Decision

Variable rate home loans offer flexibility that suits many Australian borrowers. The ability to make additional repayments, access offset account benefits, and potentially benefit from rate decreases makes them attractive for those comfortable with some uncertainty in their repayments.

However, you need to ensure you can manage potential rate increases without financial stress. Consider your income stability, existing financial commitments, and how much buffer you have in your budget before committing to a variable rate product.

At Empire Road Investments, our experienced team understands the nuances of different home loan options available across the Australian lending market. We can help you compare rates, understand home loan features, and find a solution that supports your goals to invest in property and secure your future.

Call one of our team or book an appointment at a time that works for you to discuss your home loan needs and find the right variable rate product for your circumstances.