What is a variable rate home loan?
A variable home loan has an interest rate that can go up or down over the loan term — normally in line with changes to Australia’s official cash rate.
This means your mortgage repayments will be lower when interest rates drop but higher when interest rates go up. It’s different to a fixed rate home loan where the rate (and therefore your repayments) remain the same for a set period.
Most variable rate home loans allow you to make extra repayments on your mortgage to pay it off faster, and many come with extra features such as offset and redraw facilities.
According to the Reserve Bank of Australia (RBA), the majority of new owner-occupier loans in Australia (98.6%) are variable. Variable rates are available on owner-occupier and investment home loans.
The RBA Board meets eight times a year to review the cash rate . The cash rate is the interest banks and lenders pay on the money they borrow from other banks. It influences the interest rates paid by consumers, including on home loans and savings accounts.
Will variable home loan interest rates go down in 2024?
Australia's big four banks predict potential rate cuts by the end of 2024. Commonwealth Bank and Westpac have adjusted their forecasts to anticipate the first rate cut could happen in November, aligning with the predictions made by ANZ and NAB. However, some economists suggest we won’t see any rate cuts until 2025.
Mansour Soltani , Money's home loan expert
“Make extra repayments on your variable rate home loan when interest rates are low. When interest rates are lower, the principal component of your repayments is bigger, helping you smash down your loan faster. When interest rates are higher, it’s inverted, and the interest component of your repayments is bigger so your cents and dollars don’t stretch as far. However, we always recommend consistency as you never know which way interest rates will go.”
Mansour Soltani , Money's home loan expert
What are the current variable mortgage rates?
- The lowest variable home loan rate on Money’s database is: 5.69% (comparison rate 6.15%). *Based on an owner-occupier loan (with P&I repayments) and a maximum 95% LVR.
- Based on the RBA’s Housing Lending Rates, the average variable home loan rate is: 6.27% p.a.
The best variable rates will vary depending on the type of home loan you need (owner-occupier or investor) and your loan-to-value ratio (LVR). Lenders see LVRs lower than 80% as less risky because you’re borrowing less compared to the property's value. Lower LVRs typically mean lower rates, and higher LVRs mean higher rates.
That’s why it’s important to compare loans based on your situation, as the rates lenders advertise may not reflect your borrowing position.
Types of variable home loans explained
Basic variable home loan
This is a no-frills variable home loan with limited features but a lower interest rate. For example, a basic home loan may have a discount of 0.10% p.a., compared to a lender’s other products with no offset account or redraw.
Introductory discount home loan
This type of home loan comes with a discounted ‘honeymoon’ interest rate for a period of time (usually 1-3 years), and then reverts to a higher variable rate.
Standard variable home loan
This is the typical type of variable home loan lenders offer. It comes with all the standard features you’d expect (e.g. offset, redraw) at a standard variable rate. A lender’s standard variable rate is often used as the default interest rate that applies when a borrower’s fixed-rate term ends.
Package home loan
This combines your variable rate home loan with a transaction account and other financial products, like credit cards, in exchange for a discounted interest rate or reduced fees on each product.
When should you choose a variable interest rate on your home loan?
Here are three scenarios where choosing a variable rate home loan could be suitable.
1
Rates are expected to drop in the near future
Opting for a variable rate home loan when there are predictions or indications that interest rates may decrease means you could benefit from lower repayments sooner, compared to if you were locked into a fixed-rate mortgage with hefty break costs to pay. Keep in mind that rate changes are difficult to predict. This is an area where getting advice is a good idea.
2
You want access to home loan features to pay your mortgage off faster
Variable rate home loans generally offer additional features such as offset accounts and the ability to make extra repayments without penalty. These features can help you pay off your mortgage faster and reduce your interest payable over the life of the loan.
3
You want the option to refinance without incurring fees
Variable rate home loans typically offer more flexibility when it comes to refinancing. If you anticipate changes in your financial situation or want to take advantage of better loan terms in the future, having the option to refinance without incurring break fees can be attractive. This flexibility also allows you to take advantage of lower interest rates or better loan features if you spot a better deal elsewhere.
Are variable rates cheaper than fixed rates?
Based on Money’s analysis of Australia’s big four banks, the lowest rates available are generally fixed but this may be lenders pricing their products in anticipation of rate drops down the track. The caveat here is that variable rates could change and if you have locked into a fixed rate, it may not remain the cheaper option over time.
Mansour Soltani , Money's home loan expert
“One thing you can bet on is that the banks have already priced in which way they think the market is headed into their fixed rate. They’re hoping borrowers will fix their rate purely based on wanting peace of mind. The best time to fix is when the market is not so volatile, and banks offer a great rate close to the variable. When the fixed and variable rates gap is too large like in 2024, I would choose variable."
Mansour Soltani , Money's home loan expert
How a rate change can impact your variable rate home loan repayments
Interest rate | Loan amount |
|---|---|
6.00% | $600,000 |
6.25% | $600,000 |
Interest rate | Loan term |
6.00% | 25 years |
6.25% | 25 years |
Interest rate | Monthly repayments |
6.00% | $3,865 |
6.25% | $3,958 |
Interest rate | Interest over the life of the loan (if you remain on the same rate) |
6.00% | $559,743 |
6.25% | $587,405 |
| Interest rate | 6.00% | 6.25% |
|---|---|---|
Loan amount | $600,000 | $600,000 |
Loan term | 25 years | 25 years |
Monthly repayments | $3,865 | $3,958 |
Interest over the life of the loan (if you remain on the same rate) | $559,743 | $587,405 |
In this example, a 25 basis point (0.25%) rate change could mean:
- A $93 difference in monthly repayments, totaling $1,116 annually.
- A $27,662 difference in the total interest payable over the life of the loan.
Variable rate home loan features
Offset
An offset account is a transaction account linked to your home loan that offsets your home loan balance. You can have a 100% offset where every dollar in that account offsets what you owe on your mortgage and your interest. So, if you have a $600,000 mortgage and $20,000 in your offset account, you'll only be charged interest on $580,000. Alternatively, you can have a partial offset where only a percentage of your account balance offsets your loan balance.
Additional repayments
Most variable rate home loans allow you to make additional repayments without penalty fees. This makes it easier to pay down your loan faster and save on interest.
Redraw facility
Allows you to withdraw any additional repayments you've made on your home loan. It frees up cash and provides flexibility in managing finances. You can withdraw additional repayments for any reason.
Flexible repayments
You can choose your repayment frequency (e.g. weekly, fortnightly, or monthly) or opt for an interest-only repayment option for a period of time.
Portability
This feature allows you to transfer your existing loan to a new property if you decide to sell and buy a new home.
Split loan
You can split your home loan into fixed and variable portions, balancing stability and flexibility.
Variable rate home loan pros & cons
Pros
- Your repayments decrease with rate cuts
- Freedom to make additional repayments and redraw
- Easier to refinance with no break fees
Cons
- Your repayments may increase if rates go up
- The unpredictability of variable rates can make it hard to budget or manage repayments
- You may feel the need to re-evaluate your home loan more often to ensure you’re on a competitive rate
How to compare variable home loans
Compare the advertised rate
The advertised rate is the initial interest rate lenders promote, which is a good starting point to estimate your monthly repayments. Your actual individual rate may be different depending on your LVR and loan amount. A lower interest rate means lower repayments and less interest paid in total. Even a 0.10% difference in your rate could save you thousands of dollars on your home loan. Look for the best variable rates from the big four banks and smaller lenders.
Check the comparison rate too
The advertised interest rate doesn’t give you the full picture of your borrowing costs. Lenders must also show a comparison rate. This estimates the annual cost of a home loan — including fees and interest. It’s designed to offer a more accurate comparison across different lenders and products. However, the comparison rate is always calculated by lenders based on a $150,000 loan amount and a 25-year term which won’t be realistic for all borrowers.
Consider home loan fees
Home loan fees can be the equivalent of up to 1% of your loan amount, so it’s important to consider how they will impact your bottom line. Most lenders charge standard fees to open and maintain your home loan account and additional fees like redraw fees, late payment fees, early termination fees, etc. You can often negotiate with your lender to waive some of these.
Choose the right home loan features for your needs
Choose a variable loan with features that will help you save interest on your home loan and pay it off faster. Look for an offset account, additional repayments option, and redraw facility to start with. These are the most commonly-used features, according to Mansour. Remember, some home loan features come with fees. Make sure to weigh up fees against the benefits the feature provides.
