Here the interest rate in your home loan is variable, the interest you pay on your loan may fluctuate from time to time – usually when the Reserve Bank of Australia (RBA) changes the official cash rate thus making them the most common types of home loans in Australia.
Why do people choose a variable interest rate?
Most people choose variable interest rate home loans because of the additional flexibility they provide, if you are in need of cash most institutions will allow you to withdraw additional repayments you have made over and above the minimum repayment this is called a redraw. You may also be able to hold cash in a ‘deposit offset account’ with the same institution, and use this cash balance to reduce the amount of interest you pay each month. Also you can normally make additional payments without penalty in order to pay off your loan faster.
Why do people not choose a variable interest rate?
There are some disadvantages associated with variable interest rates such as uncertainty; the interest rate is variable (apart from any start-up period) so the loan may be subject to interest rate fluctuations. Another negative is pricing, the interest rate is always higher on standard variable rate loans than ‘low frills’ loans – which is effectively the premium you pay for the additional features and flexibility.
Are honeymoon periods worth it?
Often lending institutions will offer a discounted start-up period (i.e. ‘honeymoon period’) on variable interest rate loans to motivate you to choose the loan. The benefits of this discount are usually only applicable in the first year. After that, your interest will generally be charged at that lender’s standard variable rate. Given the honeymoon period is short-lived compared to the life of your loan, you should pay close attention to the standard variable rate to ensure you are getting good value for money.
Which home loan is right for me?
Choice Home Loans mortgage brokers have access to hundreds of different types of home loans from more than 30 lenders, banks and online mortgage options. It should also be noted that you may also be able to split your home loan into variable and fixed – potentially giving you access to the benefits of both loan types. This is something your mortgage broker can help you with.