Aaron Bell
Athena Cocoves
Australia has two primary kinds of home loan interest rates: fixed and variable. Depending on the market, a variable home loan’s interest rate can go up or down. If your lender’s variable interest rate increases, so will your mortgage repayments — and vice versa.
A variable home loan differs from a fixed-rate loan, in which your interest rate and mortgage repayments remain constant for a fixed period, usually between one and five years.
What is a typical variable home loan rate?
As of January 2024, the average rate for a new owner-occupier variable home loan is 6.3%, according to data from the Reserve Bank of Australia (RBA)[1]. Those lender rates have increased alongside the RBA cash rate target, a benchmark for home loan interest rates.
Fixed vs variable home loan rates
The graph below shows the differing interest rates offered for fixed and variable-rate owner-occupier home loans.
This data shows interest rates on both new variable and new fixed-rate home loans hovering above 6% at the time of writing. It’s important to note that after the fixed-rate period expires, those loans revert to a variable rate.
Most fixed home loans expire after three years, according to RBA data. This means that many homeowners who were able to fix their home loans during the pandemic are having their loans revert to a much higher variable rate.
Comparing variable home loans
Australian mortgage lenders offer an assortment of variable home loan products. Before you compare options, make sure you understand these key features and differences.
Repayment structure
An interest-only loan is a type of variable loan that structures repayments differently than a standard principal and interest loan. With an interest-only loan, you are not obliged to pay off any of the principal for a set period (up to five years), just the interest. This structure makes the loan more affordable during the interest-free period.
However, it also means the principal is not coming down and you’ll end up paying way more interest over the term of the loan. So, interest-only loans are typically better suited for investors.
Repayment frequency
Some lenders let you choose how often you make mortgage repayments (weekly, fortnightly or monthly). Paying weekly or fortnightly means you pay off your loan more quickly as you make more repayments, reducing your principal.
The ability to make extra repayments is a feature that allows you to increase the frequency of your minimal repayment schedule. These adjustments can reduce the principal over time and the amount of interest you have to pay over the loan term.
» MORE: Understanding your mortgage amortisation schedule
Features
Offset accounts and redraw facilities can also help you pay off your home loan faster.
Offset Accounts
Some variable home loans come with an offset account. This account acts as an everyday transaction account linked to your home loan. It helps you as a borrower because the amount in your account gets offset against your loan’s principal.
For example, you may have $200,000 left on your home loan and $20,000 in your offset account. You will only pay interest on $180,000 rather than $200,000.
» MORE: Can you have multiple offset accounts?
Redraw facility
A redraw facility allows you to make extra mortgage repayments and then withdraw the money when you need it.
For example, if your regular repayment amount is $900 monthly and you pay off $1,200, you can access that extra $300 through your redraw facility.
These features are more common in variable home loans and are not usually available with a fixed-rate mortgage.
» MORE: What happens to redraw at the end of your loan?
Fees and offers
Like any financial product, variable home loans have fees for processing applications and missed repayments. Consider these extra costs before taking on a loan, as a low rate may come with high fees that can add up over a 20- or 30-year term.
On the flip side, lenders offer promotions such as cashback deals to attract buyers.
» MORE: Types of home loans in Australia
Variable home loan pros and cons
Deciding to get a home loan is a substantial financial decision as you are taking on a sizable debt that can take 25-30 years to repay. Your circumstances should most influence the best loan for you, but weighing the pros and cons of the options available is still essential.
Pros
- Features — like offset, redraw and extra repayments — can help you pay off your loan sooner.
- If interest rates drop, so should your repayments.
- You may have no exit fees if you want to switch home loans or refinance with another lender.
Cons
- If interest rates rise, your repayments will follow. Increased repayments are one of the biggest risks, as you have no control over how high the repayments can go.
- Extra features can come with added fees.
Alternatives
If the market’s rises and falls are too risky for you as a borrower, you have other options.
Fixed-rate home loan
A fixed-rate home loan allows you to lock in the interest rate for a set period (usually one to five years). Your mortgage repayments will stay the same during this period, regardless of what happens in the market.
Split rate loan
A split loan allows you to lock in a fixed rate for a portion of your home loan and a variable rate for the other. You can usually decide which portion you want to assign to each rate.
Splitting your loan can protect you more from a volatile market than a variable rate. However, it can also mean you miss out on potential savings should interest rates fall.
How to choose
When choosing your home loan, consider your budget, income, expenses and career security. Could you weather a storm of rising rates? Do you have the financial flexibility to make the most of an offset account? Consider how your financial goals and circumstances factor in.
Locking in a fixed-rate home loan can give you peace of mind because you’ll know what’s coming out of your bank account each repayment. On the other hand, you may not be able to make extra repayments or take advantage of features such as offset accounts and redraw facilities.
Riding the market can be challenging if you opt for a variable loan. If your repayments rise with interest rates, you could experience mortgage stress. However, variable loans offer more flexibility to pay off your loan sooner or refinance to a better deal if you require it.
Taking advantage of a free consultation with a home loan expert, such as a mortgage broker, and doing your research can be good starting points in making a decision.
Article Sources
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Reserve Bank of Australia, “Lenders' Interest Rates,” accessed March 27, 2024.
About the Author
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