Variable rates explained
A variable home loan rate is a type of interest rate on a mortgage that fluctuates over time in line with the official cash rate set by the Reserve Bank of Australia
Unlike a fixed-rate mortgage, where the interest rate remains the same for the a selected loan term, a variable rate can change at any time, depending on market conditions. When the Reserve Bank of Australia raises or lowers the official cash rate, your lender may decide to also increase or decrease the variable interest rate on your home loan. This means that borrowers with a variable rate will have to pay either more or potentially less interest on their mortgage.
How often does a variable rate increase?
Variable interest rates in Australia can change at any time, depending on the lender and the economic conditions. However, most variable rates are influenced by the official cash rate set by the Reserve Bank of Australia (RBA). The RBA meets on the first Tuesday of every month to review economic conditions and make a decision on whether to change the cash rate.
When the RBA changes the cash rate, it affects the variable interest rates offered by banks and other lenders. The RBA has been known to change the cash rate multiple times a year - and whilst the cash rate has been at an all time record low for quite some time, last year in 2022 it increased in an upward trend 8 consecutive times.
It’s important to also note that regardless of the decision from the RBA, banks (and non-bank lenders) can also change their variable rates independently of the RBA's actions. This is usually because the banks/lenders have their own funding costs and risk profiles, which can differ from the RBA's decisions. As a result, variable rates can fluctuate frequently, even if the cash rate remains unchanged. It’s a legal requirement for lenders to give written notice of variable rate changes well in advance.
Benefits of a variable rate home loan
Having a variable rate home loan means the loan can be subject to interest rate fluctuations - dependent on the RBA and the lender. With that said, there are a number of pros and benefits to having a variable rate home loan. Some of those include:
- Potential to save money: With a variable rate home loan, borrowers have the potential to save money on interest payments if the central bank lowers the official cash rate.
- Flexible Repayment options: Many lenders offer flexible repayment options such as the ability to make extra repayments or redraw funds, which can help borrowers to pay off their mortgage sooner.
- No lock-in period: A variable rate home loan does not have a lock-in period, which means borrowers can switch to a different loan or lender at any time without penalty.
Cons of a variable rate home loan
Variable rate home loans can offer lower interest rates and greater flexibility, but they also come with some downsides which include but are not limited to:
- Rate fluctuations: Variable rates can fluctuate with the official cash rate set by the RBA, which can change at any time, and as a result, borrowers may have to make larger repayments if interest rates increase.
- Uncertainty: Borrowers with variable rate loans may feel uncertain about their future repayments and may have difficulty budgeting if interest rates fluctuate.
- Lack of predictability: Variable rate loans do not offer the same level of predictability as fixed rate loans, making it harder for borrowers to plan their finances.
What factors should borrowers consider when shopping for a variable rate loan?
When researching which home loan product is right for you, your mortgage broker will be able to assist you, however if you are shopping around for a variable rate loan by yourself, you should consider:
- The interest rate: The interest rate on a variable rate loan can fluctuate, so it is important to compare the current interest rate offered by different lenders and consider how likely it is to change in the future.
- The repayment terms: It's important to consider the loan's repayment terms, such as the length of the loan and whether there are penalties for early repayment.
- The fees and charges: Some variable rate loans come with additional fees, such as application fees or ongoing account-keeping fees. It's important to compare the total cost of the loan, including these fees, to find the best deal.
- The reputation and customer service: It's always a good idea to research a lender's reputation and customer service record before applying for a loan. This will give you an idea of how easy it will be to work with the lender in case of any issues or concerns.
- The lender's policy on interest rate changes: Some lenders have policies that limit the amount the interest rate can change in a given period, while others may have no limit. It's important to understand the lender's policy to know what to expect in terms of interest rate changes.
- The flexibility: Some variable rate loans may have more flexibility in terms of making extra repayments or changing the loan amount. It's important to consider if the loan has the flexibility you need.
It's important to consider your personal circumstances when choosing between a variable and fixed rate. If you're comfortable with the risk and have a stable income, a variable rate could be a good option. But if you're on a tight budget or want more certainty about your repayments, a fixed rate may be a better choice.
How can borrowers compare the various variable rate loan options available to them?
When it comes to comparing different home loan options, there are plenty of options on the market. From comparison sites to online brokers, the list seems endless and can become overwhelming.
That’s why with Joust Instant Match, only matches you with home loan offers that meet and match your specific requirements. Once connected with a Joust partner broker they will be able to listen to you and help you with your needs. Try Joust Instant Match today.
*The information in this blog article is current as of January 2023 and is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.