Learn more about variable rate home loans
in this helpful guide
22 March 2022|4 minute read
When you buy or refinance your property, one important decision you’ll have to make is choosing between the different types of home loans available.
In this guide, we’ll take you through what a variable rate home loan is, the benefits and drawbacks, as well as the differences between a variable rate and fixed rate home loan.
Home loan interest rates are essentially the cost of borrowing money from a lender and typically expressed as a percentage. They determine the amount of interest you pay on your home loan repayments.
For example, let’s say you have a home loan of $300,000, a loan term of 30 years and an interest rate of 2.12%. Your estimated monthly repayments would be $1,126 and you’d pay $105,703 in interest (the cost of borrowing money) over the life of your loan.
Borrowers can choose to repay their home loan at a variable, fixed or split rate. It’s useful to note that you are not limited to choosing one over the life of your loan and can switch between the three.
If you’d like to find out how much you might need to pay on your home loan, use our Aussie Mortgage Repayments Calculator.
A variable rate home loan has an interest rate that is subject to change monthly, depending on the lender.
On a variable rate home loan, if the interest rate increases, so do your repayments. If it decreases, so too do your repayments.
Lenders decide home loan interest rates but they are influenced by a variety of factors. Each month, the Reserve Bank of Australia (RBA) sets the official cash rate (OCR).
Lenders typically use the OCR and other market conditions to determine their own rates, but can increase and decrease their rates independent of the OCR.
Interest rates can change due to a range of factors. Some of these include:
There are a range of benefits available for borrowers who decide to go on a variable rate home loan. These include:
There are also a few potential drawbacks with variable rate home loans. Borrowers should be prepared because:
Yes, most lenders will generally let you switch from a variable rate to a fixed or split rate home loan without penalty.
A fixed rate home loan allows you to lock in an interest rate for a set period of time.
Regardless of rising or falling interest rates, a fixed interest rate remains the same for the fixed period of typically 1-5 years. This means your loan repayment amount remains the same each month over the set period.
A split rate home loan, also known as a partially-fixed interest loan, allows you to reap the benefits of both variable and fixed rate home loans.
For one portion of your split loan, your interest rate remains fixed, while the other portion provides you with more flexibility as the market changes. It’s important to note that the split doesn’t need to be 50/50.
Keep in mind that there may be other costs associated with refinancing, so it’s worth weighing the potential upfront costs with the long term benefits and savings.
You can always reach out to your local Aussie Broker to discuss if a variable home loan rate is right for you.
Learn more about fixed rate home loans and the benefits and drawbacks in this helpful guide.
Find out how splitting your loan could help you make the most of a fixed and variable interest rate.