The short version
- A variable rate moves with the market, usually following the Reserve Bank's cash rate.
- Variable loans usually allow unlimited extra repayments, redraw and an offset account.
- Leave room in your budget for rises.
Fixed or variable
Either way, your repayments usually cover some of the loan and the interest. A fixed rate stays the same for a set period, often the first one to five years, then reverts to variable. Repayments don't change in that time, which makes budgeting easier, but if rates fall you can end up paying more than you would on a variable rate.
A variable rate can apply from the start, or after a fixed period ends. It can go up or down at any time.
How variable rates move
Lenders set their own variable rates. They usually follow the Reserve Bank's cash rate, but can move at any time and don't always pass on the full change.
When rates fall your repayments can drop, and when they rise your repayments go up, so leave room in your budget.
Offset accounts
Many variable loans come with an offset account: an everyday account whose balance is taken off your loan when interest is worked out. For example, with $345,500 owing and $6,250 in your offset, you pay interest on $339,250.
Extra repayments and redraw
Most variable loans let you pay extra when you have spare money, such as a tax refund, which cuts the balance and the total interest you pay. A redraw facility lets you take that extra back out later, usually without a fee.
Fixed loans often limit or charge for these features, because the lender has built its expected return into the fixed rate, and extra repayments eat into it.
Pros and cons
- Usually unlimited extra repayments, with no break fee to refinance or pay off early.
- Often an offset account or redraw.
- Refinancing is usually simpler and cheaper than from a fixed loan.
- Your repayments fall when rates fall.
- Your repayments can rise at any time, which makes budgeting harder. If you're already stretched, a rise can cause real difficulty.
What sets your rate
The rate a lender offers you depends on:
- The size of your deposit, as a share of the home's value as the lender assesses it.
- Whether you'll live in the home or rent it out.
- Whether you repay principal and interest or interest only.
- Whether the rate is fixed or variable, and the loan amount.
- Your credit history and finances. A clean credit report can help you get a lower rate and approval.
Alternatives
- A fixed rate home loan, for repayments that won't change for a few years.
- A split loan, with part fixed and part variable.
- Refinancing your current loan, if you already own a home. A lower rate on your existing loan can save more than a new product.
How to apply
Most people get pre-approval for a variable rate home loan before they start making offers, then the full approval once they've found a home.
- Get your documents together. Payslips, two years of tax returns if you're self-employed, bank statements showing your savings, and details of your debts and credit limits.
- Get pre-approval. It tells you how much you can borrow and shows sellers you're serious. It usually lasts three to six months.
- Find the home and sign the contract. The lender then values the property before it gives full approval.
- Settle. Your lender pays the seller, and your repayments start about a month later.
What to compare
Start with the rate for your situation: the rate a lender offers depends on whether you'll live in the home or rent it out, how you repay, and the size of your deposit. The comparison above picks each lender's rate for your choices.
Then look past the rate.
- Fees: upfront fees, and annual package fees that often come with an offset account.
- Features: an offset account, redraw, extra repayments and the option to split the loan between fixed and variable.
- The comparison rate, which adds standard fees to the rate for an example loan of $150,000 over 25 years.
- Any cashback, but only after the rate and fees, since a higher rate can cost far more over the life of the loan.