Variable rate home loans

What are variable rate home loans?

This loan is the most popular type of loan sold to consumers in Australia, for those who go directly to a lender. Normally packed with features that will allow you to have flexibility at its maximum, there are many options and features that we will go through in the paragraphs below.

• The interest rate on this loan moves up and down in line with changes in market rates which can be dictated by either the lender or the reserve bank of Australia
• These loans have a lot of features that we will discuss further on. One of the main advantages to a standard variable-rate loan is that it can normally be packaged, meaning that you can pay a fee each year which will give you a discount that should save you thousands of dollars.
• In addition to this, the lender may also offer you a transaction account and credit card as part of your package.
• You may also be entitled to discounts for insurances and other services the lender may offer you in conjunction with your home loan.

Modifications to a standard variable rate home loan may include an introductory rate home loan, the intro rate home loan is a loan that is offered at a lower rate for a very short time, usually just the first year. This loan can be suitable in certain circumstances only.

• The intro rate home loan is only offered for new borrowings and will not be available as a refinance option for an existing loan with the same lender. It is a "teaser rate" for new business and it is purely designed to get new clients in the door, for the lender that is advertising it.
• The most common forms of these loans will mean that the borrower will have a low rate for either one or two years in most cases, and that when this first or second year is finished, the interest rate will revert to the bank’s standard variable-rate. There are many pitfalls in this type of loan that you need to be aware of, to know if this will be suitable for you in the longer term.

Some people may enquiry about a Professional Package variable home loan. This is another modification to a standard variable home loan. For a Professional Package loan you can receive a discount based on two criteria: The loan amount and the LVR. LVR is the amount of loan vs the property value. Example: House valued at $500,000 with a loan of $400,000 is an 80% LVR. Loans more than 80% LVR usually receive lower discounts. A few lenders do not use LVR pricing and their full discounts will still apply. Applicants with borrowings over $250,000 will be offered a discount off the lenders standard variable-rate. These discounts usually start at 0.5% with most lenders. The more you are lending, the bigger the discount.

Another type of variable rate home loan available to you is a residential construction loan. A construction loan offered by lenders to assist clients who are wanting to build a new home or renovating an existing property. The loan is funded by five separate payments usually called progress payments or drawdown payments. The loan is designed to be paid to the builder as they complete five critical stages of the building works. As each of the five stages is finished, the builder will invoice the owner. The owner will pass the invoice on to the lender. The lender will have the site inspected, and if the work is deemed satisfactory, they then pay the builder for the work completed so far.

So, should you choose a variable-rate home loan?

A variable-rate loan can be suitable for a variety of situations. This type of loan will suit a borrower who has the ability to pay extra on to their home loan in order to pay it down quicker. There are few restrictions on a variable rate home loan and most of these facilities come with all the usual features available from the bank or lender. This would include the following:

• Extra repayments – either weekly, fortnightly, monthly or a lump sum.
• Other features available are – Redraw, loan portability, interest only availability, construction, offset account and the option for paying the loan out early with minimal fees.
• You also have the option to attach a package to your loan which will normally incur a fee. Normally the package discount off your standard variable-rate will save you a lot more money than the fee that you would pay.
• If you’re variable-rate loan is packaged, then the majority of lenders who provide this type of loan will also waive your loan application fees and valuation fees.
• Because the loan is on a variable-rate it can go up and down with the market. This means that you are at the mercy of the lenders if rates do go up. It would be advisable to speak with your finance broker at Illawarra Mortgage Brokers to determine if this loan would be suitable for your situation.

Let’s have a look at the pros and cons of a standard variable-rate home loan.

What benefits are there for you in variable-rate home loans?

• Package Deals: Also known as Professional Packages, package deals are available for borrowings over $250,000.

They are normally available from most lenders and they are a wonderful thing in that you will normally obtain a discount from the lender that will far outweigh the cost of the package fee.

Note: The more you borrow, the higher the discount off the standard variable rate. We have seen these discounts range from 0.3% to well over 1%.  it is also worth noting that the package fee will not increase just because you may be borrowing more money. Quite a substantial saving if you have a large loan.

• 100% offset account: This is by far the most popular offset arrangement. You are basically offsetting your savings dollar for dollar against your mortgage, provided that this account is linked to the mortgage account and noted as an offset account and provided that there are funds in the offset account.

Sometimes the lenders will charge a fee for you to have an offset account. This fee can range from $10 a month to $200 a year or if you have a package loan, there may be no fees on the offset account because you will be paying the annual fee to the lender..

• Additional or extra repayments with no fees: This means that you can pay extra money onto the loan per week, fortnight or month or you can pay a lump sum whenever you want to.
• Interest only available: For investment purposes and owner occupier purpose. This means that you can pay just interest on your loan instead of principal and interest. Please speak with your advisor if this would be a suitable option for your needs.
• Redraw: Available for most variable rate loans and in most cases there will be no fees. This means that you can redraw any excess amounts that you have paid over and above your minimum repayments.
• Partial offset: Available with most lenders and  usually with no fees. Because this is a partial offset it means the bank is not giving you a 100% benefit on funds in your offset account. This also is why there are usually no fees attached to a partial offset account. In effect you are “partially offsetting” the balance in your offset savings account against your mortgage loan.
• Repayment holidays are available: Provided that you have made additional repayments. This means that if you are in front of your repayments and if you need to stop repayments for a short time then you may do so. Not every lender will allow you to do this so please speak with your mortgage broker to see if it is a viable option from the lender that you are considering.
• Our favourite Loan: Standard variable rate with no package fees, application or valuation fees, no account keeping fees that still have a discount attached from the lender? How Awesome! Call your mortgage broker for more details to see if you qualify for this type of loan.

These are our favourite loans are one of the most common loans that we provide. However not many lenders actually have these loans, just a few.

Some lenders will have a starting standard variable-rate that will be lower than the big four banks. These lenders will  often offer a discount off that rate along with all the features that we have listed above and more.

An example of this loan would be borrowings above $250,000 and this loan will have no application fees, no valuation fees, no monthly fees, no yearly fees and also no ATM fees at any ATM, in some cases.

Does it get any better than this? We don’t think so. Of course not everybody will qualify for this particular loan, and depending on your circumstances, this may or may not be a fit for your circumstances.

Please speak with your mortgage broker to find out if a standard variable-rate loan would be suitable for you.

What do you need to be careful of in a variable-rate home loan?

• Interest rates can move up unexpectedly which will force you to pay a higher amount on your repayments. Depending on the lender and also on the reserve bank of Australia rates will change over time. They may go down or up and this will definitely affect how much you will need to be paying onto the loan. There are other options out there that will allow you to have the best of both worlds. This is covered on our structured split loan facility page.
• Depending on the lender, you may not get offered the most attractive discounts on your interest rate. Not all lenders are obligated to offer you discounts. Some lenders seem to operate on a take it or leave it basis. In saying that, we do have a huge amount of lenders who do offer some fantastic discounts and packages.
• One other potential downside to worry about is when interest rates start to move up. Historically we know that when interest rates are on their way up, the first thing that the banks do to protect themselves, is increase their fixed rate products. If you have a variable-rate loan and there is an upward swing in interest rates, chances are that you will get caught at a higher rate if you decide to fix your loan. There is no right or wrong in fixed and variable rate loans, it really comes down to what you think the market will do as you move forward and what kind of impact it will have on your circumstances.

In reality there are not a lot of downsides to a standard variable-rate mortgage, but there are enough alternatives out there that should be explored before committing to this loan. Please have your finance broker assist you in determining the right product for your individual needs.

How can I apply?

These are your simple steps to apply for a loan.

• Contact us on 02 4257 5626 to speak to a mortgage broker, or complete our online enquiry form.
• You will speak with a broker who will take into account your needs by discussing not only your requirements, but also any concerns you have, and offer you some possible strategies and ideas that you may not have thought about.
• Once we know what you require, we will draft and email you a proposal– this will usually consist of a few options that are easy to understand.
• Once you have had a chance to look at what options are available, you can contact your broker or the broker will call you, to discuss the proposal.
• You can then decide if you wish to proceed or you may just want to discuss more options.

What are my other options?

There are many options available, check out our Loans page which lists the most popular loans we cater for. Whether you are after a variable interest rate, a fixed interest rate, interest only loan, equity loan or any of the other loans available, it is important that you find out what is available to you before applying for a loan. Speak to your Broker to find out which loan is the best for you, call us on 02 4257 5626 today.

‍