Standard and Basic variable loans are the most popular home loan in Australia. Interest rates go up or down over the life off the loan depending on the official rate set by the Reserve Bank of Australia and funding costs. Your regular repayments pay off both the interest and some of the principal.
Here we give you an overview of the different types of variable rates, features and benefits in the current market:
Repayment Options
Principal & Interest
Repayments are calculated on the total term of the loan and the fixed interest rate that you select.
Weekly or fortnightly repayments
Instead of a regular monthly repayment, you pay off your home loan weekly or fortnightly.
This can suit people who are paid on a weekly or fortnightly basis, and will save you money because you end up making more payments in a year, cutting the life of the loan.
Repayment holiday
You can take a complete break from repayments, or make reduced repayments, for an agreed period of time.
This can be useful for travel, maternity leave or a career change.
Interest only repayments
You only pay the interest on the loan, not the principal, usually for the first one to five years although some lenders offer longer terms.
Many lenders give borrowers the option of a further interest-only period. Because you’re not paying off the principal, your monthly repayments are lower.
These loans are especially popular with investors who pay off the principal when the property is sold, having achieved capital growth.
Extra Repayments
If you pay more than the required regular repayment, the extra amount is deducted from the principal.
This not only reduces the amount you owe but lowers the amount of interest you repay.
Making extra repayments regularly, even small ones, is the best way to pay off your home loan quicker and save on interest charges.
Other Features
Redraw facility
This allows you to access any extra repayments you have made. Knowing you have access to funds can provide peace of mind.
Be aware lenders may charge a redraw fee and have a minimum redraw amount.
Direct Debit
Your lender automatically draws repayments from a chosen bank account.
Apart from ensuring there is enough cash in the account, you don’t have to worry about making repayments.
All in one home loan
This combines a home loan with a cheque, savings and credit card account.
You can have your salary paid into it directly.
By keeping cash in the account for as long as possible each month you can reduce the principal and interest charges.
Used with discipline, the all-in-one feature offers both flexibility and interest savings.
Interest rates charged to these loans can be higher.
Offset account
This is a savings account linked to your home loan.
Any money paid into the savings account is deducted from the balance of your home loan before interest is calculated. The more money you save, the lower your regular home loan repayments.
You can access your savings in the usual way, by EFTPOS and ATMs.
This is a great way to reduce your loan interest, as well as eliminate the tax bill on your savings.
Lenders provide partial as well as 100% offset accounts.
Be aware the account may have higher monthly fees or require a minimum balance.
Portable Loans
If you sell your current property and buy somewhere else you can take your home loan with you.
This can save time and set-up fees, but you may incur other charges.
Professional package
Home loans over a certain value are offered at a discounted rate, combined with discounted fees on other banking services.
These can be attractively priced, but if you don’t use the banking services you may be better off with a basic variable loan.
What you need to know
Benefits of a Variable Rate
- If interest rates fall, the size of your minimum repayments will too.
- Standard variable loans allow you to make extra repayments. Even small extra payments can cut the length and cost of your mortgage.
- Basic variable loans often don’t come with a redraw facility, removing the temptation to spend money you’ve already paid off your loan.
You should be aware of
- If interest rates rise, the size of your repayments will too.
- Increased loan repayments due to rate rises could impact your household budget, so make sure you take potential interest rate hikes into account when working out how much money to borrow.
- You need to be disciplined around the redraw facility on a standard variable loan. If you dip into it too often, it will take much longer and cost more to pay off your loan.
- If you have a basic variable loan, you won’t be able to pay it off quicker or get access to money you have already repaid if you ever need it.
