Variable rate home loans explained

When it comes to the home buying process, one of the biggest choices you’ll be faced with as a buyer is what type of interest rate to go with. Variable rate home loans are one of the most popular types of loans you can choose from. They offer a range of unique advantages that could benefit your personal and financial circumstances.

What are variable rate home loans?

In a nutshell, a variable rate home loan is a loan with an interest rate that changes throughout the term of the loan. It can either go up or down depending on a number of different internal and external factors, like:

• Changes to the Reserve Bank of Australia’s (RBA) official cash rate,
• A lender’s cost in funding changes,
• The loan purpose (owner-occupied or investment),
• Interest rate type (we currently offer variable rates only),
• Loan repayment type (we currently offer a principal and interest loan only), and
• The principal amount.

If you’re on a variable rate home loan, your loan repayments will fluctuate based on the changing interest rate. So, when the interest rate increases so will your repayments and vice versa. You can learn more about how banks calculate interest rates here.

Benefits of variable rate home loans

From increased flexibility to access to additional features and facilities, there’s a lot to be said for variable rate home loans. Here are some of the main advantages that come with taking out a variable loan:

• ‍‍‍Flexible interest rate: One of the main benefits of variable rate home loans is the potential for interest rate flexibility. The interest rate on these loans can fluctuate in response to changes in the official cash rate set by the RBA and other economic factors.

• ‍Potential for lower interest rates: Variable rates may start lower than fixed rates, offering borrowers the possibility of lower initial repayments. This can be attractive to borrowers who anticipate interest rates to remain stable or decrease in the short term.

• ‍Ability to make additional repayments: Many variable rate loans allow borrowers to make extra repayments without incurring penalties. This flexibility can be a huge benefit for borrowers who are keen to pay off their home loan faster and reduce the overall interest paid over the life of their loan.

• ‍Access to facilities and features: Variable rate home loans often provide access to additional loan features, like offset accounts or redraw facilities, that may help to save you over the life of your loan. An offset account is a transaction account that can help reduce the interest payable on the home loan. The balance in the offset account is subtracted from the outstanding loan balance when calculating interest. Alternatively, redraw facilities allow you to make additional contributions on top of your minimum repayments that you can access at a later time. The funds sitting in your redraw facility reduce the balance owing on your home loan, helping you to save on interest repayments. Please note we currently do not offer offset accounts at Unloan, but a linked-CommBank offset account is coming soon.

• ‍Easier to exit: Variable rate loans usually have more flexible exit conditions compared to fixed-rate loans. This can be important if you want to refinance or pay off the loan before the fixed term ends.

Factors to consider about variable rate home loans

While variable rate home loans can unlock a number of great advantages that may benefit you as a borrower, it’s also important to consider the potential risks and drawbacks that come with these types of loans:

• ‍Interest rate volatility: One of the most significant drawbacks of variable rate home loans is the potential for interest rate volatility. As the interest rates are subject to market conditions and RBA decisions, borrowers may experience fluctuations in their monthly repayments. For example, if the RBA or the lender decides to increase interest rates, borrowers with variable rate loans may see an increase in their repayments. This could lead to financial strain for those who haven't budgeted for higher repayments.

• ‍Difficulty budgeting: If you like to account for your mortgage repayments as part of your household budget, variable rates make it challenging to predict your long-term financial commitments accurately. The uncertainty in interest rates can make budgeting more difficult compared to fixed-rate loans, where monthly repayments remain stable for the length of the fixed term.

• ‍Potential for increased interest costs: Over the life of the loan, variable rate borrowers might end up paying more interest compared to those with fixed-rate loans, especially if interest rates rise significantly during the loan term.

• ‍Impact of market conditions: Variable rates are influenced by broader economic conditions, which can be unpredictable. Factors like inflation, unemployment and global economic trends can impact interest rates, making it challenging for borrowers to anticipate future changes accurately.

• ‍Additional fees: While variable rate loans often come with greater flexibility and access to additional features and facilities, banks and lenders will often charge a fee for the privilege. Depending on your individual circumstances and goals, you might find these fees are easily offset by the convenience factor of having access to these features. But with that said, it’s important to do your homework and read the terms and conditions carefully before taking out any loan product.  

At Unloan, we offer one simple competitive variable rate. Although we don’t offer offset accounts, we do have a redraw facility that can allow you to save on interest and take advantage of those extra repayments that you make on your home loan. Do you have more questions about our variable rate home loan? Our friendly Unloan lending specialists are ready to help, so get in touch with us today.

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This article is intended to provide general information only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. Please consider seeking financial advice before making any decision based on this information.‍

Unloan is a division of Commonwealth Bank of Australia.

Applications are subject to credit approval; satisfactory security and you must have a minimum 20% equity in the property. Minimum loan amount $10,000, maximum loan amount $10,000,000. 

Unloan offers a 0.01% per annum discount on the Unloan Live-In rate or Unloan Invest rate upon settlement. On each anniversary of your loan’s settlement date (or the day prior to the anniversary of your loan’s settlement date if your loan settled on 29th February and it is a leap year) the margin discount will increase by a further 0.01% per annum up to a maximum discount of 0.30% per annum. Unloan may withdraw this discount at any time. The discount is applied for each loan you have with Unloan.

There are no fees from Unloan. However, there are some mandatory Government costs depending on your state when switching your home loan. For convenience, Unloan adds this amount to the loan balance on settlement.

* Other third-party fees may apply. Government charges may apply. Your other lender may charge an exit fee when refinancing.