Variable rate home loans

When you apply for a home loan, one of the most important decisions you’ll need to make is whether you should choose a variable or fixed interest rate loan. We’ll help you to understand the advantages and disadvantages of a variable rate before you start comparing the variable rate home loans we have on offer.

By   |   Verified by David Boyd   |   Updated 1st October 2021

Comparing variable rate home loans for $450,000.00 over 30 years

Reduce Rate Slasher Variable Home Loan - LVR up to 80% (Owner Occupier) (Owner, Principal and Interest)

Reduce Rate Slasher Variable Home Loan - LVR up to 80% (Owner Occupier) (Owner, Principal and Interest)

Interest rate (p.a.)

2.39%

Comp rate^ (p.a.)

2.40%

Max LVR

80.00%

Application fee

$440.00

Monthly repayment

$1,752.42

Total repayment

$630,871.20

Highlights

  • Get a low variable rate home loan and pay less interest.
Virgin Money Standard Variable Rate (Investor, Interest Only)

Virgin Money Standard Variable Rate (Investor, Interest Only)

Interest rate (p.a.)

4.54%

Comp rate^ (p.a.)

4.58%

Max LVR

90.00%

Application fee

$300.00

Monthly repayment

$2,290.79

Total repayment

$824,684.40

Highlights

  • Split your borrowings and lock in a portion of your loan with a fixed rate to get repayment certainty over a fixed period.
  • Rate discounts based on LVR and loans size for loans with an LVR of 90% or under.
Virgin Money Standard Variable Rate (Owner, Principal and Interest)

Virgin Money Standard Variable Rate (Owner, Principal and Interest)

Interest rate (p.a.)

4.12%

Comp rate^ (p.a.)

4.28%

Max LVR

90.00%

Application fee

$300.00

Monthly repayment

$2,179.62

Total repayment

$784,663.20

Highlights

  • Split your borrowings and lock in a portion of your loan with a fixed rate to get repayment certainty over a fixed period.
  • Rate discounts based on LVR and loans size for loans with an LVR of 90% or under.
NAB Base Variable Rate Home Loan (Investor, Principal and Interest)

NAB Base Variable Rate Home Loan (Investor, Principal and Interest)

Interest rate (p.a.)

2.99%

Comp rate^ (p.a.)

3.60%

Max LVR

80.00%

Application fee

$600.00

Monthly repayment

$1,894.79

Total repayment

$682,124.40

Highlights

  • Flexible repayment options
  • Access to redraw with no fees
  • No early repayment, or ongoing monthly service or annual fees.

ANZ Simplicity PLUS

ANZ Simplicity PLUS

Interest rate (p.a.)

2.72%

Comp rate^ (p.a.)

2.76%

Max LVR

80.00%

Application fee

$0.00

Monthly repayment

$1,829.94

Total repayment

$658,778.40

Highlights

  • Competitive variable interest rates and no monthly fee.
  • Make extra repayments any time.

NAB Choice Package Variable Rate Home Loan (Investor, Interest only)

NAB Choice Package Variable Rate Home Loan (Investor, Interest only)

Interest rate (p.a.)

4.57%

Comp rate^ (p.a.)

4.75%

Max LVR

90.00%

Application fee

$0.00

Monthly repayment

$2,298.84

Total repayment

$827,582.40

Highlights

  • Flexible repayment options
  • No fees for making extra repayments, so you can get ahead on your mortgage faster.
  • Get discounts and benefits with your variable rate home loan through the NAB Choice Package.
NAB Choice Package Variable Rate Home Loan (Investor, Principal and Interest)

NAB Choice Package Variable Rate Home Loan (Investor, Principal and Interest)

Interest rate (p.a.)

4.27%

Comp rate^ (p.a.)

4.67%

Max LVR

90.00%

Application fee

$0.00

Monthly repayment

$2,219.00

Total repayment

$798,840.00

Highlights

  • Flexible repayment options
  • No fees for making extra repayments, so you can get ahead on your mortgage faster.
  • Get discounts and benefits with your variable rate home loan through the NAB Choice Package.
ING Mortgage Simplifier Home Loan (Owner, Principal and Interest)

ING Mortgage Simplifier Home Loan (Owner, Principal and Interest)

Interest rate (p.a.)

2.78%

Comp rate^ (p.a.)

2.81%

Max LVR

80.00%

Application fee

$0.00

Monthly repayment

$1,844.24

Total repayment

$663,926.40

Highlights

  • Make extra repayments for free, redraw your money, pay bills with available funds via BPAY and more.
  • Enjoy $0 monthly, annual and transaction fees - you could pay off your loan faster.
  • Get rebates on fees from any ATM woldwide and ING international transaction fees when you add Orange Everyday to your home loan.
ING Orange Advantage Home Loan (Owner, Principal and Interest)

ING Orange Advantage Home Loan (Owner, Principal and Interest)

Interest rate (p.a.)

2.83%

Comp rate^ (p.a.)

3.17%

Max LVR

80.00%

Application fee

$0.00

Monthly repayment

$1,856.21

Total repayment

$668,235.60

Highlights

ING Orange Advantage Home Loan (Owner, Principal and Interest)

Tic Toc Live in Loan Variable Rate Home Loan

Tic Toc Live in Loan Variable Rate Home Loan

Interest rate (p.a.)

1.89%

Comp rate^ (p.a.)

1.90%

Max LVR

80.00%

Application fee

$0.00

Monthly repayment

$1,638.64

Total repayment

$589,910.40

Highlights

  • Up to 30 years loan term.
  • No upfront and ongoing fees.
  • Free online redraw on any additional repayments.
UBank UHomeLoan Variable Rate

UBank UHomeLoan Variable Rate

Interest rate (p.a.)

2.34%

Comp rate^ (p.a.)

2.34%

Max LVR

80.00%

Application fee

$0.00

Monthly repayment

$1,740.84

Total repayment

$626,702.40

Highlights

  • There are no ongoing or annual fees to pay and no application fees on a variable rate home loan.
  • Rates are highly competitive.
  • Easy online apply.

Overview

The interest rate on a home loan can be either fixed or variable, but in both cases the periodic repayments include both a portion of the loan principal and interest as well.

Fixed interest rate

As the name implies, fixed home loans have an interest rate that does not change during the fixed rate period, which may be the first 1-5 years of the loan's term, before reverting to a variable rate for the remainder of the term.

During the fixed rate period, monthly repayments never change, and are easier to budget for. But in an interest rate environment where rates generally are falling, having a fixed interest rate could lock you into paying more in interest than you would with a variable rate.

Variable interest rate

Home loans with a variable rate may have a variable interest rate from the very beginning, or revert to a variable rate once the fixed interest term expires. A variable rate can go up or down, often – but by no means always –in line with a change in the Reserve Bank's official cash rate.

Home loans with variable interest rates more difficult to budget for because monthly repayments will vary, but it will benefit the borrower in a market environment where interest rates generally are falling.

Variable interest rate loans also have additional features not generally available with a fixed rate loan, such as an offset bank account and an extra payment and redraw facility.

Offset bank account

An offset bank account is often offered by bank lenders in conjunction with a variable interest rate loan. It operates in the same way as a standard bank transaction account, except that any positive balance in the account is taken into consideration when calculating the interest payable on the remaining home loan principal.

For example, if you had a remaining home loan principal of $345,500, and a deposit balance of $6,250 in your offset account, interest on your home loan at that point would be payable on an amount of $339,250 (i.e. $345,500 minus $6,250), not the full loan principal amount of $345,500.

Extra payment and redraw facility

An extra payment and redraw facility is a further feature often accompanying a variable rate home loan. It gives you the option of making additional loan repayments when you have spare cash available (from a tax refund, for example) to reduce the loan principal. It means that you will pay less interest in total because you will shorten the time it takes to repay the loan in full.

Should you find, at a later date, that you need access to that extra cash you committed to your home loan, you can withdraw it, usually without penalty, if you also have a redraw facility.

Fixed rate home loans do not normally come with offset accounts and extra payment options, or if they do, there may be significant additional fees involved. That's because the bank has calculated the amount of profit it needs to make on the loan and built it into the fixed interest rate. Offset account and extra repayment options erode that profit and could even turn it into a loss unless extra fees are charged.

Working out which kind of rate is best for you

Whether you decide to go for a variable rate from the start of your loan, or a fixed rate reverting to a variable rate, largely depends on how much budgeting certainty you require in the early years of your loan, and whether you can make good use of the flexibility offered by an offset account and extra payment and redraw facility.

Your credit score will significantly affect the rate you are offered

There are several factors that determine the interest rate your are offered on your loan. They are:

  • Your credit score
  • The price of the home
  • The amount of your deposit as a percentage of the home's value as assessed by the bank
  • The loan term
  • The interest rate type
  • Whether you are an owner-occupier or an investor

Your credit score tops the list because it's usually the most important factor. An excellent credit score will help to secure you a low interest rate, while a poor credit score will see you being offered a much higher rate and make getting loan approval more difficult.

If you're in the market for a home loan you should monitor your credit score constantly, which you can do free of charge right here at Finty. We can also help with some tips on improving your credit score.

Learn about variable rate home loans

Our team share their top tips for comparing home loans with a variable interest rate.

  • Pros & cons

  • Tips

  • FAQs

Budgeting uncertainty

Periodic repayments for a fixed rate home loan are set in concrete. You know exactly how much you will have to pay each week, fortnight or month – exactly the same amount throughout the fixed rate period of the loan. But with a variable rate your periodic repayments will go up or down whenever the lender’s standard variable rate changes. This makes it much harder to budget for repayments.

Easier to refinance

Fixed rate home loans are rather difficult to wriggle out of without paying substantial fees. Variable rate home loans are easier to terminate if you see a better deal down the track, and the process will cost less.

Periodic repayment amount will increase if interest rates rise

If interest rates are rising and your lender’s standard variable rate goes up as a result, your required periodic payment amount will also increase. If you stretched yourself to the limit when taking on the loan, you may struggle to meet the higher repayments now required. In this situation, discuss your problem with your lender at the earliest opportunity. You need to avoid the worst case scenario – defaulting on your loan and having your home repossessed by the lender.

Periodic repayment amount will reduce if interest rates fall

If interest rates are falling and your lender’s standard variable rate goes down as a result, your required periodic payment amount will also reduce if you have a variable rate loan. But don’t bank on this, because interest rates are volatile. Many borrowers sensibly choose to continue making the same repayment amount, even if the lender notifies them that the required amount has gone down.

Variable rate loans are more likely to have an offset account

A variable rate home loan is much more likely to have an optional offset account. An offset account is a bank transaction account held with the lender providing your home loan. You can leave in your offset account any spare cash you may have, and the amount will be deducted from your remaining loan account balance for the purposes of calculating your periodic interest charges. So an offset account will reduce your interest cost, although it won’t have much effect if you rarely have any spare cash. Fixed rate home loans do not usually come with an offset account.

Variable rate loans are more likely to have a redraw facility

If you use a variable rate loan's flexible repayment system to make additional or higher loan repayments, your loan principal will reduce at a faster rate than strictly required by the lender. But if the day arrives when you need some extra cash – for an emergency, say, or for home renovations or a new car – you can withdraw some or all of the extra repayments you have made. Fixed rate home loans do not usually come with a redraw facility.

Variable rate loans have a flexible repayment system

Fixed interest rate home loans do not usually allow borrowers to make extra repayments in order to pay the loan off earlier. By fixing the rate, the lender has calculated exactly how much profit it needs to make on your loan. If you pay it off earlier you’ll pay less interest and the lender will lose some of its profit. But variable rate home loans usually allow you to make extra repayments, so you can choose to pay the loan off faster and save money – possibly many thousands of dollars over the life of the loan.

A small difference in the interest rate translates into a lot of dollars

Don't make the mistake of thinking that a tiny difference in the variable interest rate is insignificant. Where two loans have identical features except for the interest rate, it's wise to choose the one with the lowest rate, even if the difference is less than one tenth of a percentage point. The government's Moneysmart mortgage calculator says that paying 2.55% p.a. on a 30-year loan of $300,000 would cost $1,693 less in total interest than the same loan at 2.58% p.a.

Do your research and compare all loan features

Although comparing loans on the basis of the advertised variable rate is a good place to start, it's important to consider all features of competing loans before making your final decision. There's also no guarantee that a lender will offer you their lowest advertised rate, since this may be reserved for borrowers with a large deposit and an excellent credit score.

The easiest way to compare the loans available to you is online, where you should consider the following loan features side-by-side:

  • Advertised variable interest rate
  • P.a. comparison rate
  • Schedule of loan fees and charges, to check for any fees which may not be included in the comparison rate.
  • Offset account, if offered. Is it 100% offset or partial offset?
  • Extra repayment and redraw facility, if offered.
  • Choice of loan terms. You may not want to be locked into a term of 25 years or 30 years term.

If rates fall, try to maintain the same repayment

If your bank advises you that your variable interest rate has reduced, the amount that you are obliged to pay each month will go down as well. But there's nothing to stop you continuing to make the same repayment you were previously making, which is now more than the bank is insisting on. Getting ahead with your repayments in this way will not only pay off your loan earlier in the long term, it will also provide you with some financial wriggle room in the short term if your budget gets tight in future and you do need to reduce your repayments for a while.

You don't need to accept the variable rate offered by your normal bank

Many variable rate home loan lenders are competing for your business, so you don't need to settle for the loan product your regular bank is offering you. Although it may still turn out to be the best one in the end, it's still a good idea to compare all your options online first. At the very least, your up-to-date market knowledge will help you to negotiate better loan terms from your current bank.

Are variable rate loans a good idea?

They can be, depending on your financial circumstances. If you're on a really tight budget that can only just accommodate the loan repayments, it might be a good idea to avoid a variable rate at first, because although rates can go down (a good reason for choosing a variable rate) they can also go up (which means you might no longer be able to afford your repayments).

But if you believe you can meet the monthly repayments quite comfortably, then choosing a variable rate will let you take advantage of any general fall in interest rates.

How do I choose between a variable rate and a fixed rate?

Compare loans and find one with the features you need and that you will actually use. For example, there’s little point in looking for a loan with a redraw facility and offset account if your budget is so tight that you rarely have any spare funds for making extra repayments or for parking in an offset account. But just because your budget is strained when you first take on the loan, you may find things easier later on, so remember to plan for the future.

Deciding which loan features you need or don’t need will often determine whether you go for a flexible, feature-rich variable rate loan or an inflexible but comfortingly predictable fixed rate loan with fewer features.

Is it better to get a fixed or variable mortgage?

It depends on what features you are looking for in a mortgage.

If you want to know exactly how much your monthly repayments will be for the first few years of your loan, choose a loan with an introductory fixed rate, but make sure that the lender's standard variable rate is competitive before you sign up. This will be a good guide to the likelihood of your being offered a competitive variable rate when your fixed term expires.

If you can cope with the fact that your monthly repayment may go up or down in the first few years, as well as for the remainder of the loan term, you could choose a variable rate to lock in benefits like an offset bank account and penalty-free extra repayments, funds redraw and early exit from the loan.

What are the advantages of a variable rate home loan?

  • Flexible repayment system: Fixed interest rate home loans do not usually allow borrowers to make extra repayments in order to pay the loan off earlier. By fixing the rate, the lender has calculated exactly how much profit it needs to make on your loan. If you pay it off early you’ll pay less interest and the lender will lose some of its profit. But variable rate home loans usually allow you to make extra repayments, so you can choose to pay the loan off faster and save money — possibly many thousands of dollars over the life of the loan.
  • Offset account: A variable rate home loan is much more likely to have an optional offset account. An offset account is a bank transaction account held with the lender providing your home loan. You can leave in your offset account any spare cash you may have, and the amount will be deducted from your remaining loan account balance for the purposes of calculating your periodic interest charges. So an offset account will reduce your interest cost, although it won’t have much effect if you rarely have any spare cash. Fixed rate home loans do not usually come with an offset account.
  • Redraw facility: A variable rate home loan is much more likely to have redraw facility. If you use the flexible repayment system to make additional or higher loan repayments, your loan principal will reduce at a faster rate than strictly required by the lender. But if the day arrives when you need some extra cash — for an emergency, say, or for home renovations or a new car — you can withdraw some or all of the extra repayments you have made. Fixed rate home loans do not usually come with a redraw facility.
  • Easier to refinance: Fixed rate home loans are rather difficult to wriggle out of without paying substantial fees. Variable rate home loans are easier to terminate if you see a better deal down the track, and the process will cost less.
  • Periodic repayment amount will reduce if interest rates fall: If interest rates are falling and your lender’s standard variable rate goes down as a result, your required periodic payment amount will also reduce. But don’t bank on this, because interest rates are volatile. Many borrowers sensibly choose to continue making the same repayment amount, even if the lender notifies them that the required amount has gone down.

What are the disadvantages of a variable rate home loan?

  • Budget uncertainty: Periodic repayments for a fixed rate home loan are set in concrete. You know exactly how much you will have to pay each week, fortnight or month — exactly the same amount throughout the term of the loan. But with a variable rate your periodic repayments will go up or down whenever the lender’s standard variable rate changes. This makes it much harder to budget for repayments.
  • Periodic repayment amount will increase if interest rates rise: If interest rates are rising and your lender’s standard variable rate goes up as a result, your required periodic payment amount will also increase. If you stretched yourself to the limit when taking on the loan, you may struggle to meet the higher repayments now required. In this situation, discuss your problem with your lender at the earliest opportunity. You need to avoid the worst case scenario – defaulting on your loan and having your home repossessed by the lender.

What is a variable rate home loan?

The interest on a home loan can be charged at either a fixed rate or a variable rate.

If the rate is fixed, it will never change during the term of the loan.

If the rate is variable, it can go up or down at any time, when the lender changes its standard variable rate. A lender may change its standard variable rate in response to a change in the Reserve Bank of Australia’s official cash rate, because this rate affects the lender’s own borrowing costs.

But the lender is not obliged to pass on to its borrowers any or all of the change in the Reserve Bank’s cash rate, even though the federal government may urge them to do so if the rate goes down. The lender may also decide to change its standard variable rate for other reasons, usually justified by competitive forces or profitability changes.

Which rate is usually higher, a fixed rate or a variable rate?

It depends on how lenders view the future of the interest rate market. They employ economists who examine current and likely future economic indicators and market forces, and try to predict whether interest rates both in Australia and globally will go up or down within a given period, and by how much. They use this data to calculate the fixed interest rates they offer, after building in a profitability margin.

So, if the lender believes that its own borrowing rates will rise in the future, the fixed interest rate it offers to customers will be higher than its current standard variable rate. But if the lender believes that interest rates are likely to decline, it will probably offer a fixed interest rate that is lower than the current standard variable rate.

Most home loan borrowers will not have a better understanding of the interest rate market than professional economists, so the best way to choose between a fixed and a variable interest rate is not by comparing the two kinds of rates on offer and choosing the lowest. It’s more important to look at the advantages and disadvantages of each kind of interest rate.

The advantages and disadvantages of a fixed interest rate loan are explained on our Fixed rate home loans page.

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