Variable Rates Explained

What are the benefits of taking out a variable rate loan? What are the downsides? How do you calculate your monthly repayments? Here you’ll find out everything you need to know about variable rate home loans.

| | 4 minute read

How Variable Rate Home Loans Work

A variable rate home loan is one where the interest rate will vary based on the current state of the market. Lenders offer it as an alternative to fixed-rate loans. If you go for a fixed-rate loan, the interest rate will remain the same for a set time, usually up to five years.

Some experts point out that variable home loan rates are better in the long run. If the interest rate goes up, your interest will go up, too. However, if it goes down, the interest rate will decrease. In this second case, you’ll end up paying less.

There’s another thing to consider when choosing what type of rate to go for. When you take out a fixed-rate loan, the interest rate you get reflects the state of the market at that time. If the interest rates are on the rise when you get a loan, you’ll end up saving more than you would at a variable rate.

The Benefits of Variable Rate Home Loans

When interest rates are declining, your repayments will be lower. Variable rates can prove to be a good choice in this uncertain economic climate. With variable rate home loans, banks often give certain extra features, too.

• Unlimited redraws on repayments made early. This allows you to withdraw any money you have deposited in advance from your account.
• An offset account. The banks subtract the offset account balance from the mortgage account balance. This difference is the net balance for which they charge interest. As a result, your repayments will be lower.
• Make more repayments at no extra cost. This allows you to repay your loan faster if you have the means. If you do this, you will also save on interest.
• It costs less to change loans. When you have a variable rate loan, changing to a different loan is easier. If you find a better loan somewhere else, it will cost you less to get out of your current deal.

The Downsides of Variable Rate Home Loans

It’s the uncertainty of the market that makes taking out variable rate loans risky. If there’s a sudden increase in the rates, you will have to pay more to meet the terms and conditions of the loan.

The negative aspects of these loans reflect onto your budget. First, it’s impossible to plan your spending in advance. Loan interest rates will often change, as will the value of your repayments.

When you applied for a home loan, you planned according to your budget at the time. With rates on the rise, your payments will have to be larger. If your budget is still the same as it was then, you may even fall behind on your repayment schedule.

Calculating Home Loan Repayments

With variable rate home loans, it’s difficult to determine how much the loan will cost you in the end. Most lenders’ websites feature a home loan repayment calculator. It works on all loan types, including those with variable rates.

You can enter the amount of your loan, its purpose, and its term. The calculator shows you how high your repayment installments will be. You can also use it to compare different loans to find out which one gives you the best deal on the whole.

The information in this article is general in nature. Please seek advice from a licensed professional when making financial decisions.

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Alexi Neocleous

With over 20 years experience, Alexi has written extensively a wide cross section of financial topics. These topics range from financial planning, mortgages, property commentary and all points in between.

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