Variable Rate Mortgages: The Things You Need To Know

What is a variable rate mortgage

A variable rate mortgage is one of the most common types of home loans in Australia, and is also one of the most competitive products for lenders.

A variable rate mortgage gives you flexibility and the ability to capitalise on changes in the economy that lower the interest rate which is several types of variable rate mortgages, including standard variable, discounted rate, and tracker rate.

The interest rate you pay variable rate mortgages can go up and down in line with the Reserve Bank of Australian (RBA) base rate. Although they do not offer protection from future rate increases, they will allow you to benefit from cheaper payments when interest rates are low. However, when the RBA decreases the interest rate, your loan repayments may be reduced.

How it work?

Types of Variable Rate Mortgage

・Tracker Mortgages

This is variable rate home loans that remain at a constant level above the official cash rate and “track” the RBA’s cash rate movements.

・Standard Variable Rate Mortgages (SVR)

This mortgage usually contains the bells and whistle loan options - such as offset accounts, waived loan application fees and discounts on other banking products like transaction accounts, insurance, and more.

・Discounted Variable Rate Mortgages

This mortgage is cheap as chips, and you can still make unlimited extra repayments to get the balance down sooner.

Variable vs Fixed Rate Mortgage?

A variable rate home loan is a home loan product which has an interest rate which fluctuates up or down over time as your lender sees fit. Unlike a fixed rate home loan where the rate is locked in for a fixed term, the interest rate on a variable rate mortgage moves up and down by market changes.

Key points of Variable Rate Mortgages

Repayments may increase if interest rate rises
It could be harder to budget for the future as you can’t be sure how interest rates might rise
Help you save on the interest you pay

Key points of Fixed Rate Mortgages

Plan for the future and set financial goals with confidence
Lock in your interest rate so you know what your repayments will be
Protect yourself against interest rate rises

For example:

Jack's family decide to select a Fixed / Variable Rate Mortgage. Jack has saved up a deposit and want to borrow $300,000 for a $600,000 apartment.

・With a Fixed Rate Loan:

If they fix their rate for 30 years at 3.49% their repayment will be $1,345 per month.

・With a Variable Rate Loan:

If they choose a variable rate loan at 3.6% they will be repaying $1,372 per month at first. If the bank increases the variable rate by 0.5% to 4.1%, they will be repaying around $1,447 per month.

In conclusion

A variable rate mortgage could save you a lot of money on your total mortgage repayments, but you must always consider that your mortgage rate could end up a lot higher once rates rise.
Whether you decide to go one of the major lenders, like ANZ, Commonwealth Bank or NAB, be aware that interest rates offered are usually not the same, and there are often other factors that determine the actual interest rate your receive.

The information in this article is general in nature. Any advice it contains is general advice only and has been prepared without taking into account the objectives, financial situation or needs of any particular person.
The article content is not intended to be a substitute for professional advice and readers are urged to seek their own appropriate advice before making decisions.
Any reference to a particular investment is not a recommendation to buy, sell or hold the investment.

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