A Guide To Variable Rates For Home Loans

Whether you’re refinancing, looking to invest in property or getting your first home loan, you can save with a variable rate home loan.

However, there are some things you should be aware of to get the best value for your money. Here’s what you need to know about variable rate home loans…

What is a variable interest rate?

When you take out a home loan, the lender will charge you interest. Interest rates are either fixed or variable.

A fixed interest rate stays the same for an agreed period of the loan term, whereas a variable interest rate goes up and down according to the official cash rate. 

The official cash rate is set by the Reserve Bank of Australia (RBA), and it's been moving upward quite a lot lately.

Why would you want a variable rate loan?

Variable rate loans can be a good option when the official cash rate is low. Under that circumstance, you’ll often pay less monthly interest on a variable rate loan than on a fixed rate loan. 

However, variable interest rates may increase at any time - especially when the RBA raises the official cash rate. As long as you're aware of this risk, variable rate loans can save you money.

Which is better - a variable or a fixed interest rate?

This depends on your financial circumstances as well as your tolerance for risk. Some people don’t mind a variable rate, whereas others prefer the certainty of a fixed rate and fixed repayments for a few years.

While fixed interest rates tend to be a little higher than variable interest rates when the official cash rate is low, they will generally protect you from paying higher interest rates if the official cash rate is increased, and your bank lifts its mortgage interest rates accordingly. 

If you're a property investor, you may prefer the certainty of repayment amounts that fixed interest rates offer.

However, it’s important to remember that fixed interest rate loans are generally only fixed for a certain period (usually between one and five years), and revert to the standard variable interest rate after the set period. 

As such, they're most worthwhile if you believe interest rates will be on the rise during the early years of your loan term.

Some lenders also offer extra features on variable rate loans such as unlimited redraws on additional repayments, no fees on extra repayments, and lower refinancing costs.

Is there risk involved with taking out a variable rate home loan?

The main risk of taking out a variable rate loan is the uncertainty that comes with changing interest rates. Depending on the state of the property market and the economy, you may benefit from lower prevailing market rates, or you may experience increased repayments due to rising interest rates. 

For example, variable rates started rising higher than expected and several months earlier than predicted in 2022 when the Reserve Bank of Australia raised the official cash rate, so home owners who took out variable rate mortgages when interest rates were lower, found themselves hit with higher repayments.

Ultimately, it depends on your own financial situation and how you would cope if your monthly mortgage repayment went up.

How do you calculate variable interest rates?

Variable interest rates are typically expressed as an annual figure, referred to as 'per annum' (p.a.). 

• To calculate how much interest you’ll pay per month, start by dividing your interest rate by 12. 

• Then multiply that number by the balance of your loan. 

• This will give you the amount of interest you’ll need to pay in the next month. 

For example, if you have a $500,000 home loan on a 2.7% p.a. interest rate, divide 0.027 by 12 to get 0.00225. Then multiply 0.00225 by 500,000 to get 1,125. That means your monthly interest repayment will be $1,125. Your actual repayment may be higher - because your repayment includes paying back a portion of the $500,000 you borrowed.

Do variable rates ever go down?

Lenders do typically decrease variable interest rates when the official cash rate is lowered. However, with the official cash rate at a new high of 4.35% (as of 6th February, 2024), all indicators are that home loan interest rates are likely to remain high for a while. 

As such, there probably won’t be significant downward pressure on variable interest rates in the short-term future.

What is the difference between the variable interest rate and the comparison rate?

Here’s where it gets a little complicated. Your interest rate isn’t the only thing to consider when comparing loans. Your loan term, repayment frequency and lender fees also influence the overall cost of your loan. 

Lenders are required to provide a comparison rate, which is designed to be a more accurate indication of the overall cost of your loan, rather than just the interest rate that's being offered. 

For example, a home loan with a low interest rate and high lender fees may have a higher comparison rate than a home loan with a higher interest rate and lower lender fees. The idea is that the comparison rate indicates which loan is the best overall deal. 

Are variable interest rates safe?

Variable interest rate loans are safe as long as you understand that the interest rate on your loan may rise in the future. If you budget accordingly, you’ll be just fine. 

However, if potential increases in your interest rate would make it difficult for you to make your mortgage repayments, then you may be better off sticking with a fixed rate loan.  

What are the current variable interest rates?

According to the RBA, average current variable interest rates are sitting at around 6.21% for new loans and 6.5% for outstanding loans. However, variable interest rates differ between lenders. That’s why Compare Club examines 50 lenders to find the best deal on a home loan to suit you.

What is a standard variable rate?

Most lenders apply a standard variable rate to their standard home loan product. This standard home loan typically includes all the lender’s special features, such as unlimited redraws and no-fee extra repayments. 

Lenders will then usually offer lower variable interest rates on other home loan products that may not include as many special features. This is sometimes referred to as their basic variable rate.

How does a variable home loan work?

When you take out a variable home loan, your monthly repayments generally cover the principal (or the outstanding amount of the loan), the interest, and any lender fees that are applicable. 

Your monthly principal repayments will be based on the term of the loan (usually 25 to 30 years), and interest and lender fees will be applied on top of your principal repayments. For variable home loans, the interest rate that is applied will likely fluctuate over the term of the loan. 

What is a split rate home loan?

A split rate home loan is a type of loan where you divide your loan into separate parts. This means you can allocate a part of your loan to a fixed interest rate, and another part to a variable interest rate.

This way, you have the potential to take advantage of lowering interest rates, while still being protected from rising rates with the part of your loan that is on a fixed rate. A split rate home loan is a good option to consider if you are on the fence about a fixed rate loan or a variable rate home loan.

Can I get an offset account with a variable rate home loan?

Yes, most bank lenders allow you to get an offset account with a variable rate home loan. An offset account is a bank account that is directly linked with your home loan.

You can deposit or withdraw as much you like, and use it to make repayments for your variable rate home loan. The more repayments you make in your offset account, the less interest you will have to pay on your home loan.

Where can I find the best variable rate?

Whether you’re refinancing, looking to invest in property or getting your first home loan, Compare Club will get you on your way. We’ll look across 50 lenders to find the best deal on the right home loan for your particular needs.

With dozens of home loan lenders competing for your business, it can be a minefield out there. Compare Club is here to help you make sense of it all. We can show you how much you could save when you apply for a mortgage through our extensive lending panel.

This guide is opinion only and should not be taken as financial advice. Check with a financial professional before making any decisions. Fees, charges, terms and conditions apply.

The information contained on this web page is of general nature only and has been prepared without taking into consideration your objectives, needs and financial situation. You should check with a financial professional before making any decisions. Any opinions expressed within an article are those of the author and do not specifically reflect the views of Compare Club Australia Pty Ltd.