Variable Rate Home Loans

The interest rate on a variable rate home loan fluctuates with the official interest rate set by the Reserve Bank of Australia (the amount of fluctuation depends on the actual interest rate rise passed on to you by your lender).

Each interest rate rise on your loan is usually in line with the rise set by the RBA (however some banks have recently passed on more than the official increase to their borrowers). As a 'general rule', your variable rate home loan will usually reflect any increases or decreases in the official interest rate and your mortgage repayments will change accordingly.

Variable Rate Home Loans (They’re Popular)

Variable rate home loans are the most popular type of home loan in Australia. As a loan type, they are more flexible than fixed rate home loans and offer the largest feature set. There are three types of variable rate home loan – The Standard Variable Rate loan, the Basic (Discounted) Variable Rate Loan and the Introductory Rate Home Loan.

Standard Variable Rate Loans are flexible home loans are often called ‘fully featured’ loans as they contain the most features, where these features can assist you to shorten the life of your loan (the actual feature set on standard variable loan varies between lenders).

The differentiating features between Standard Variable Rate loans and Basic (Discounted) loans often includes the ability to make unlimited ‘additional repayments’ with no penalties during the loan term, or the ability to make use of a linked ‘mortgage offset’ account on your loan where these features are often not available on a Basic (Discounted) loan. The benefit is that both of these features will allow you to pay of your loan at a faster rate:

• Additional Repayments allow you to put more money into the loan so that you reduce your remaining principal, therefore reducing the remaining interest and the remaining total loan amount.
• A ‘Mortgage Offset’ account is a feature where you can use any cash that you have in a transaction account with the lender to offset the remaining principal, reducing the monthly interest amount. 

The rule with a variable rate loan is that interest rates will inevitably go up and down during your loan term so you should prepare for that. With these loans you get the best feature set - the cost is that you are at risk of potential interest rate rises.

Basic Variable Rate Home Loans (Discounted Rate Home Loans)

An alternative to the Standard Variable Rate home loan is a Basic Variable Rate home loan, where the word ‘basic’ describes the fact that there are less features available in the loan.

The benefit of a 'basic' loan is that the interest rate is usually discounted from the standard variable rate as a trade off for the fewer features available. These Basic Variable Rate loans are variable rate loans so they still have a fluctuating interest rate, but the interest rate stays proportionally lower than the standard variable rate, reducing your monthly repayments.

Basic (discounted) variable home loans are often referred to as ‘no frills’ home loans’ due to the fewer features, the main perk being the lower interest rate. However, the fewer features available with these types of loans might limit your ability to repay the loan more swiftly during the loan term (for example, you may not be able to make extra repayments or use a mortgage offset account).

Basic home loans might be right loan for you if you are looking for a consistently lower interest rate home loan or mortgage.

Introductory Rate Home Loans

In order to attract new customers, lenders have been competing on the interest rate that the borrower pays in the first few years of the loan, making it cheaper to get started in the loan.

Many lenders now offer introductory rate home loans, where the interest rate is reduced for the first 1,2 or 3 years of the loan and then reverts to the variable interest rate. The introductory period is known as the ‘honeymoon’ period or ‘honeymoon’ rate. These loans have the appeal of competitively low interest rates for a short set term at the beginning of the loan, reducing your monthly repayments in the first few years.

There are two types of Introductory Rate home loan – the Fixed Introductory Rate and the Variable Introductory rate.

• With a Fixed Introductory Rate your introductory interest rate is fixed for the introductory period
• With a Variable Introductory Rate your introductory interest rate may rise and fall with the interest rate rises / falls of the lender's standard variable rate

It is important to remember that the introductory rate will end. Your interest rate will revert to the actual variable rate on the loan which will be higher than the intro rate honeymoon.

About Interest Rates

The Reserve Bank uses interest rates to alter the amount of money available in the economy to combat inflation (rising prices) so that the economy does not overheat. The basic theory is that when the RBA raises interest rates, they want people to have less money in their pockets so that the people spend a little less. With less money in people's pockets, there is discretionary spending and less pressure on prices and fewer price rises for goods, therefore less inflation. The point is that you need to be prepared: during your mortgage interest rates will go up and will come down, depending on the state of the economy.