Variable Interest Rate Home Loans
Variable rate home loans along with fixed rate home loans are the two broad home loan products offered by home loan lenders. So that you can make the best decision for you, it is important to understand how each of the home loan products work, This can be done by considering the advantages and disadvantages of different home loans available.
What are variable rate home loans?
Variable home loans have a variable interest rate which is based on home loan interest rate market conditions. On the other hand, a fixed rate home loan has an interest rate that stays the same for a specific period of time, usually between 1 and 5 years.
The interest rate on a variable home loan moves up or down based on market conditions. A fixed home loan interest rate on the other hand stays the same for a defined period of time, usually 1-5 years.
Is a variable interest rate higher than a fixed interest rate home loan?
Variable home loan rates can either be higher or lower than a fixed rate home loan rate.
The interest rate on offer depends on whether home loan lenders believe that interest rates will fall further in the future. If a fixed interest rate on offer is lower than the variable rate, it is a sign that the home loan provider believes that variable interest rates will fall in the future.
Borrowers should note that there is generally two interest rates advertised on a home loan product. These are the nominal interest rate and the comparison rate. The comparison rate is usually higher and the interest rate to look out for because it includes the total cost of the home loan, including interest on the loan as well as any associated fees and charges.
Thanks to the National Credit Code, lenders are legally obligated to market the comparison rate and advise borrowers. This allows any potential borrowers to compare actual costs accurately.
What type of variable rate home loan products are there?
Home loan providers generally have a range of variable home loan products to help borrowers cater for their individual needs.
They include:
Basic Variable Home Loan
Sometimes called a “no frills” loan, this home loan product has limited additional features and has a slightly lower interest rate.
Complete Feature Variable Home Loan
This is the most popular variable home loan product in Australia. Referred to as the “standard” variable home loan it comes with a range of additional features for borrowers to utilize such as:
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The ability to make additional payments
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A redraw facility which allows the borrower to access any extra payments on their home loan,
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An offset account. This is where the borrower can offset the balance of their home loan against the balance in a separate account, saving them significant interest.
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Variable rate / fixed rate option where ethe borrower can fix part of the loan interest rate to provide some security in the event that interest rates fluctuate.
Variable Interest Rate Package Home Loans
Borrowers can combine other financial products such as a credit card into one package,
The home loan provider often charges a lower interest rate, but will often charge annual fees. This is where it is important for borrowers to consider the comparison rate to confirm the actual cost of the loan.
Introductory Variable Interest Rate Home Loans
This home loan product generally has what is known as a honeymoon period where the lender will offer a discount on their variable interest rate for a short period, usually 12 months. Following the honeymoon period, the loan will revert back to the lenders variable home loan rate.
What are the advantages and disadvantages of variable home loans?
Variable interest rate home loans as well as fixed rate home loans have advantages as well as disadvantages. There are a number of circumstances that the borrower should consider when deciding which home loan product is the right fit. Some of the things you need to consider when deciding which is the best home loan for you includes:
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Your personal financial situation and what structure suits your income, lifestyle and other financial commitments.
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Market changes to interest rates. If interest rates go down you will be paying less than a fixed interest rate home loan for the same amount. If they go up you will be paying more.
Variable Interest Rate Home Loan Advantages
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On a variable rate home loan you will pay less than if you were on a fixed rate home loan if interest rates go down.
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Complete featured variable home loans provide borrowers access to a range of useful additional features that a fixed rate home loan does not.
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Variable rate home loans generally have lower fees than fixed rate home loans.
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There are no break fees if borrowers wish to change to fixed rate home loan product at any stage.
Variable Rate Home Loan Disadvantages
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If you have a variable rate home loan you will pay more interest than a borrower with a fixed rate home loan.
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Any increase in interest rate will increase your repayments.
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A small rise in interest rate may cause what is known as home loan stress where borrowers find themselves in a situation where their income does not cover all of their financial commitments as well as their home loan repayments.
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It is more difficult to budget for future expenses on a variable home loan as, you do not have any guaranteed fixed repayments over a specific period as you would with a fixed rate home loan.
What should a borrower consider when deciding on a variable rate home loan?
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Whether a variable home loan product best suits their needs.
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The comparison rate of the different types of variable home loan products.
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Any cost for additional features and the fees for these products.
What's the Yellow Line?
Buying a home is likely to be the largest financial decision you will make. There are a vast range of products and banks are extremely competitive. It is best to seek professional financial advise to ensure you obtain the most appropriate home loan product for your needs.
Yellow loans has a vast range of lenders with a range of products to achieve the best results on obtaining the best home loan deal for you. You can contact us here and we can get your future looking bright.
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We are here to help, so if you are considering taking out finance and want to know more about the best loan options we are only a call away. You can call us or request a call back below and one of our experienced finance specialists can assist you with the most competitive loan products in Australia.
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