How variable interest rates work

When purchasing your first property, you’ll start hearing the term variable rate home loans. This guide helps you understand how a variable-rate home loan works, as well as the advantages and disadvantages.

When it comes to buying a home and choosing a home loan, you’ll need to decide on whether a variable or fixed interest rate is right for you. Each has pros and cons, but understanding how variable interest rates work is crucial to making the right choice. 

Firstly, let's look at a few quick definitions.

• The home loan interest rate is the cost a lender charges to borrow money. The interest rate is the amount that a borrower must pay the lender - in addition to the funds they've borrowed - and is expressed as an annual percentage

• A variable interest rate can rise or fall throughout the term of the loan

• A fixed interest rate stays the same throughout the fixed term (usually between 1-5 years).

What is a variable rate home loan?

A variable rate home loan is a home loan where the interest rate fluctuates. The interest rate can go up or down in response to various factors. These can include changes in the official cash rate set by the Reserve Bank of Australia (RBA), rate changes made by your bank independently of the RBA, as well as other economic factors. 

What does this mean for a homeowner? This means your monthly mortgage repayments could increase or decrease depending on the direction of changes to interest rates.

The RBA official cash rate serves as a standard for interest rates across Australia, so here's a simple way to think about it:

• RBA cash rate increases: Your variable interest rate and monthly repayments could increase

• RBA cash rate decreases: Your variable interest rate and monthly repayments could decrease

Remember that there's no limit on how much a variable rate can change over the life of your loan, and  changes are not always decided by the RBA. 

What are the benefits of a variable rate home loan? 

The potential for lower repayments is the main attraction of variable rate loans, however variable rate loans often have more flexible features than a fixed rate loan. If the RBA cash rate falls, your variable interest rate and repayments may follow, freeing up some money in your budget. This flexibility can be attractive, especially if you expect interest rates to trend downward. 

Let's look at some other potential benefits.

• Greater flexibility: Usually variable rate loans allow you to make additional repayments without penalty. This can help you pay your loan faster and save on interest. Redraw can also be an additional feature, giving you more control over your finances

• Potential for faster equity growth: If interest rates decrease and your repayments go down, you could use the savings to make additional loan repayments. This can help you pay down your loan faster and build equity sooner, although it's important to remember that property values can fluctuate and may impact overall equity.

• Potential cost savings: Variable rates tend to be lower than fixed rates during periods of economic growth and stability. This can result in savings in the long run by paying less in interest

• Offset accounts: Usually a 100% offset feature is only available for variable rate loans. An offset account can help you save money by reducing the loan balance on which interest is calculated. At Qantas Money Home Loans, we offer 100% offset accounts*

• Easier to refinance: While refinancing typically involves a discharge fee, variable rate loans generally don't have the additional burden of break costs (which can be substantial) often associated with fixed rate loans. This means less financial risk and fewer restrictions if you decide to switch to a different lender or loan product for a better deal.

What are the disadvantages of a variable rate home loan?

The biggest disadvantage of variable rate home loans is the potential for interest rate increases. If interest rates go up, your repayments could increase, adding strain to your budget. Even a slight rate increase can mean a noticeable increase in your minimum monthly contracted repayments. With more money going out, this has the potential to negatively impact your financial plans. Let’s look at some other potential disadvantages of a variable home loan

• Less predictability: With a variable rate, predicting your future expenses and budget can be difficult. This can make it challenging to plan long-term financial goals or make significant purchases

• Not suitable for everyone: A fixed-rate home loan can be a better option if you have a restricted income and prefer financial certainty. If you expect interest rates to go up, locking in a fixed rate could give you stability in the future and peace of mind. 

Who suits a variable rate home loan?

Variable rate home loans provide flexibility for borrowers willing to accept interest rate fluctuations – if they happen. Borrowers also need to be comfortable with some level of interest rate movement risk, prefer flexibility in their loan terms, not expect interest rates to remain stable or decrease, want additional loan features, and plan to pay off the loan quickly. 

You should consider your financial situation, risk tolerance, and plans before choosing a variable rate loan.

We’re here to help. Qantas Money Home Loans offer competitive variable rate loans with 100% offset accounts, unlimited additional repayments, free online redraws, and no ongoing fees*.

You can speak to one of our home loan specialists to understand your options and what suits your financial situation best.

Apply for a variable rate home loan today with Qantas Money Home Loans. 

This information has been prepared without considering your objectives, financial situation or needs. You should consider your circumstances before acting on this information.

* Optional offset account available at $10/mth. Other fees may apply. Credit is provided by Bendigo and Adelaide Bank Limited ABN 11 068 049 178 AFSL/Australian Credit Licence 237879. Eligibility criteria, T&Cs apply. This product is only available for Qantas Frequent Flyer members. All lending interest rates are subject to change. Fees and charges may be applicable and can be found on the Rates & fees page online. Refer to T&Cs for important information about comparison rates. Members will earn an annual bonus of 100,000 Qantas Points which accrues three months after the settlement anniversary of their Qantas Money Home Loan up to 30 years, provided the loan is in compliance with the Qantas Money Home Loans Points Eligibility Policy, not in arrears or default and the loan is not the subject of hardship relief or assistance.