Variable Rate Home Loans

A variable rate home loan means your repayments change with interest rates. If rates go up, your repayments increase. If rates go down, your repayments might decrease. These loans can be a good choice in an environment with low-interest expectations.

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Benefits

Flexibility

One of the best things about variable rate loans is the flexibility to make extra repayments whenever you want—without any extra fees. This helps you pay off your loan faster and save on interest.

100% Offset Account

A 100% offset account is another great feature that you can choose with most lenders by taking their package product or if they are offering otherwise. It’s a savings account linked to your loan, and the savings in it reduces the amount of interest you pay by netting it off against the outstanding home loan balance. For example, if your loan balance is $400,000 and you have $20,000 in your offset account, you’ll only be charged interest on $380,000. This feature is generally not available with fixed-rate loans.

Adapts to the Economy

Variable rates usually follow the Reserve Bank of Australia’s (RBA) cash rate, which moves with the economy. If inflation is high, the RBA usually raises the cash rate, which can result in higher variable rate and thus higher repayments. When inflation drops and the economy slows, the cash rate often comes down, which can lower your repayments.

What to Consider

Interest rates can rise, which means your repayments could go up. This can make it harder to plan your budget.
If interest rates fall, you could save money by keeping your repayments the same. This helps you pay off your loan faster without increasing your financial burden.

Pros

Repayments go down when interest rates fall.
You can make extra repayments and access features like offset and redraw facilities.
There are no penalties for paying off your loan early, so you can become debt-free sooner.

Cons

Repayments increase when interest rates rise.
Difficult to budget in uncertain macroeconomic environment

Variable rate loans are flexible and offer plenty of benefits, but they come with the uncertainty of changing repayments. They’re a great option if you’re comfortable managing fluctuating rates and want to take advantage of features that can help you pay off your loan faster.
Another option many borrowers choose is to split the loan into two parts: one with a fixed interest rate and the other with a variable rate. It’s a smart way to combine the benefits of both: the certainty of a fixed rate and the flexibility of a variable rate.