Variable Interest Loans: What You Need To Know
Variable interest loans are home loans with rates that vary based on factors declared by the Reserve Bank of Australia. These loans come with their own features, and knowing what these are is crucial in maximising savings.
Types of Variable Interest Loans
The most common types of variable interest packages offered by lenders are the following:
- Basic loans
Most lenders offer basic variable home loan packages. These do not have too many features but have relatively favourable interest rates.
- Introductory packages
Introductory packages offer variable loans with an applied discount for the initial run of the loan. For example, some lenders set the introductory interest rate about 0.3% to 0.4% lower than normal. This can mean a lot of savings in the first few months or years of the loan.
- Standard loans
As the name implies, these packages offer standard rates that match offers from the largest banks and lenders in the country.
Tips for Getting the Best Variable Interest Loan
What are the best ways of choosing between variable interest loan packages? Take note of the following tips:
- The rate matters
As with any other type of interest rate, the lower the number, the better. However, even variable interest rates rarely make drastic jumps, so the starting rate is a good indicator of what to expect in the long run.
Note that there are certain cases, especially with long-term home loans, where the starting rate may vary significantly over time. Ask the lender about their variable interest history to make sure.
- Take note of the loan features.
Loans often come with some quality-of-life features like the following:
- Unlimited extra repayments – where borrowers may make as many extra repayments as they are able. In contrast, some loans place a yearly limit on the value of extra repayments annually.
- Redraw facilities – which allow borrowers to re-access the funds placed in a home loan.
- Offset accounts - accounts linked to a loan that may help reduce the due interest payments.
Not all loans have these features, but these are usually available with variable home loan packages. As these are pretty useful, be sure to read the fine print before signing up for a loan.
- Calculate the extra fees that come with the loan.
Loans also come with additional payments like annual, stamp, establishment, or exit fees. These fees are sometimes waived depending on the package in question. Include these waived or discounted fees when calculating savings before finalising the home loan.
- Get the right repayment type.
Loans are payable as either interest-only or principal+interest repayments. The former involves initially paying only interest fees and catching up on the principal payment later. The latter consists of paying both the principal and interest from the beginning of the loan.
Principal+interest repayments often allow borrowers to save more in the long run. However, interest-only loans are also helpful if the borrower has trouble with initially financing the loan.
- Calculate the repayments.
Finally, it is in the borrower’s best interest to calculate the repayments regularly, as well as do an estimate of total repayments.
Variable interest loans have repayment values that can change every month. As such, it’s wise to have a rough idea of how much money to set aside for paying the loan off.
Variable Interest Loan FAQs
- Is a variable loan better than a fixed loan?
They each have their pros and cons. For example, fixed loans offer the security of knowing how much repayments cost. On the other hand, variable rates, may end up cheaper and they usually come with more features.
- Are variable loans risky?
All loans come with some risk. Variable loan interest rates may vary, but extreme fluctuations are rare.
- What dictates the variable loan interest rate?
Interest rates depend on the cash rate declared by the Reserve Bank of Australia (RBA). They also occasionally declare cuts in interest rates.
Compare variable interest loans today.
Many lenders in Australia offer variable interest loans. If you’re looking to finance a home with a variable interest loan, it’s wise to compare offers side-by-side for ease. A comparison site like Makes Cents is a great choice. Take advantage of our comparison tool today!