What Are Variable Rate Loan Terms and How Do They Work?

A variable rate home loan is a loan where your lender can change the interest rate over time. That means your repayments can go up or down, and knowing the terms before you sign helps you choose a loan that suits your budget.

If you live in Moss Vale and are weighing up a variable rate against other options, this article walks through the terms that matter most. We will look at how the rate moves, which features can be added, and what to ask before you apply.

What Is a Variable Rate Home Loan?

A variable rate home loan has an interest rate that your lender can adjust at any time. Lenders often change their rates after the Reserve Bank of Australia moves the cash rate, but they decide for themselves how much to pass on and when.

The main benefit is flexibility. Many variable loans let you make extra repayments and link an offset account. The main trade-off is certainty. If your lender raises the rate, your repayments rise too, so it helps to have a buffer in your budget.

A fixed rate does the opposite. It locks your rate for a set period, which gives certainty but usually limits extra repayments. If you are coming off a fixed term, our fixed rate expiry page explains your choices.

How Do Variable Rate Repayments Change When Rates Move?

When your lender changes your rate, your minimum repayment is recalculated over the remaining loan term. A higher rate means a higher repayment, and a lower rate means a lower one.

As a hypothetical example, imagine a Moss Vale couple who borrow $600,000 over 30 years on a principal and interest, owner occupied home loan. Using an illustrative rate of 6.75% p.a., their monthly repayment would be about $3,891. If their lender lifted the rate by 0.50 percentage points to 7.25% p.a., the repayment would rise to about $4,093 a month. That is roughly $202 more each month.

Testing your budget at the higher figure before you sign is a sensible step. These figures are illustrative only, and you can run your own numbers with a repayment calculator.

Which Variable Rate Loan Features Are Worth Having?

The most useful variable rate features are an offset account, extra repayments and redraw. Each one can help you pay off your loan faster or keep cash within reach, but each can also come with a cost.

• Offset account: Money sitting in the account is netted against your loan balance, so you pay interest only on the difference. Loans with an offset can carry a higher rate or an annual package fee, so compare the total cost.
• Extra repayments: Paying more than the minimum builds equity faster. Check that your lender does not cap or charge for them.
• Redraw: You can draw back money you have paid ahead. Some lenders limit access or charge fees, so read the terms.

These features matter most if you expect your income to change or you like to save in lumps, such as farm or seasonal income. If that sounds like you, our rural loans page covers finance for properties outside town.

Principal and Interest or Interest Only: Which Suits a Variable Loan?

Principal and interest repayments reduce your loan balance as well as covering interest. Interest only repayments cover just the interest for a set period, so the balance does not fall during that time.

Interest only can lower repayments for a while, and it is more common for investors. The trade-off is that when the period ends, repayments switch to principal and interest over a shorter remaining term, so they are higher. You also pay more interest overall than if you had been paying down the loan from the start. If you are considering property as an investment, see our investment loans page.

How Does Your Deposit Affect a Variable Rate Loan?

Your deposit sets your loan to value ratio (LVR), which is the loan amount divided by the property value. A lower LVR can give you access to more lender options and may help you secure a lower rate, depending on the lender.

If your deposit is smaller, you may need to pay Lenders Mortgage Insurance (LMI). LMI protects the lender, not you, and it adds to your costs. It can often be added to the loan, but then you pay interest on it. If you are buying your first place, our first home buyers page outlines the support that may be available, and it is worth confirming current eligibility with the relevant government source.

Why Use a Broker to Compare Variable Home Loan Options?

A mortgage broker can compare variable home loan products from a panel of banks and lenders and explain the differences in rates, fees and features. The lowest advertised rate does not always mean the lowest cost once fees and features are counted.

When you speak to us, we look at your goals, your budget and how much you could borrow. You can check your numbers first on our borrowing capacity page. A broker can also help with a home loan pre-approval, so you know your price range before you start looking around Moss Vale and the Southern Highlands.

Already have a loan? A review can show whether your current rate and features still suit you. Our loan health check is a good place to start.

Call one of our team or book an appointment at a time that works for you. We will talk through your options and help you choose a variable rate loan that fits your plans.

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