Variable Home Loans
What are Variable Home Loans
With a variable home loan you borrow money from the lender in order to buy a house and then pay it back with interest calculated at the current market rate. This market interest rate is subject to change, either due to changes in the cash rate that is set by the Reserve Bank of Australia, or sometimes independently by the lender itself.
Variable home loans are provided by all of the banks and various home lenders that operate in Australia. They are the most common form of home loan available and customers have the choice of 2 main types. The standard variable home loan comes complete with a range of loan features and flexible repayment options, whilst the basic variable home loan generally has a lower interest rate but limited features.
Who are Variable Home Loans Suitable For
Almost everyone will require a home loan in order to buy a house and provided that you meet the general lending criteria then you shouldn't have trouble getting one. The general lending criteria that most banks adhere to is a good credit history, steady employment with a regular income and either a deposit that you have saved up or equity in an existing house.
Variable Home loans are the most popular form of home loan on the market today. This is because people are prepared to take the risk of an interest rate rise in the future for the benefit of low interest rates and flexibility. Fleibility to refinance the loan if they find a better deal, flexibility to make extra repayments & pay the loan of as soon as possible and flexibility to withdraw money from the loan whenever needed in the future.
Advantages of a Variable Home Loan
- If the market interest rate goes down then your interest repayments will be reduced.
- Variable home loans provide additional features like the ability to make extra repayments and convenient access to this money through a redraw facility.
- Many variable loans offer low introductory or honeymoon rates which can make you repayments much less in the initial period.
- With good financial planning you can pay off the mortgage early without any heavy penalties.
- If you find a better deal you can refinance to a different loan or another lender without too much cost (provided that you don't have to pay any deferred establishment fees).
Disadvantages of Variable Rate Loans
- If the lender's interest rate goes up then your interest repayments will be higher.
- If you have a large home loan and the interest rates go up then you could be at rick of losing your home.
- In order to get the additional features that make standard variable loans good you will have to pay a higher interest rate then if you went for a basic variable home loan.
Common Variable Home Loan Fees
- Loan Application Fee - This can sometimes be waived by the lender in order to get your business.
- Deferred Establishment Fee - This is often the same amount as the establishment fee and is charged if you take out a low introductory home loan and then try to switch to another lender within a specified number of years.
- Lenders Mortgage Insurance - This fee is generally charged if you take out a home loan with an LVR greater than 80%.
- Settlement Fee - Is payable upon completion of the home loan.
- Monthly or Ongoing Maintenance Fees - Paid either annually or monthly these fees are normally associated with loans that have extra features like redraw or offset account.
- Additional Repayment Fee - If you choose a home loan that doesn't allow extra additional repayments to be made for free then the lender may charge you this fee.
- Redraw Fee - Can be charged whenever you withdraw from the account money from previous additional repayments.
- Split Loan Fee - If you want to place a percentage of your home loan onto a fixed interest rate then this fee may ve charged by the lender.
- Late Payment Fees - Charged if you are late making your regular repayment.
Important Aspects About Variable Loans
Try to avoid having to pay Loan Mortgage Insurance (LMI) as this can be $1000's and you get no real benefit from it. All you are paying for with this insurance policy is to protect the lender in the event that you default on the loan. To not have to pay LMI you will be required to have at least a 20% deposit when purchasing the house.
Don't worry that much about being charged a monthly fee for getting access to loan features like an offset account or the ability to make additional repayments for free. This is because if you use these features properly then you can save a lot more than the small fee that you are paying each month. If possible, however, try to get these loan features without having to pay any ongoing fees.
Do not let the attraction of cheap honeymoon rates cloud your judgement when choosing a variable home loan. At the most these cheap interest rates only last for 1 year out of the 25 year term of the mortgage. By all means take advantage of any low introductory interest rate, but ONLY if the overall loan product is the best one for your needs.
If you are worried that rising interest rates will put you under financial strain, but you don't want to lose the benificial variable loan features such as a redraw facility or mortgage offset account then consider splitting your loan. You can have a percentage of your loan fixed providing the security of predictable repayment amounts and the remainder of the loan variable with all the benefits of the advanced loan features.
If there is some loan terminology or abbreviations that you are unsure about the meaning off then you can check out the home loan definitions page, which has a detailed explaination about some of the more confusing aspects of getting a home loan.
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