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The best variable rate home loans may save you thousands over the life of the loan. But how can you find the best variable rate for you?

Pros & cons

It is common in Australia to choose a variable rate home loan but why do so many people like variable rates?

Variable rate pros

  • More flexible: Variable rate home loans have more features available, giving them more flexibility. They can allow extra repayments, offset accounts and free redraw just to name a few.

  • Rate cuts are passed on: If variable rates fall, your lender may pass on all or some of this reduction. This may mean your repayments could also be reduced.

  • Able to change loans or lenders: With no early exit fees on variable loans you are able to shop around and change lenders at anytime throughout the loan term. Also if you sell the property, the loan can be discharged without break costs you could get if the loan was fixed.

  • Gradual adjustment: If interest rates increase, these will occur over a period of time which gives you time to re-adjust your budget for increased repayments. If you are struggling, you can make adjustments gradually to reduce your expenditure and increase your income.

Variable rate cons

  • Rate increases are passed on: While it may be good news that rate cuts are passed on, it also means that you will have to deal with rate increases too which could see your repayments increase.

  • Repayments aren’t predictable: If you are on a tight budget, increased repayments with increasing interest rates can make things difficult. If you are in this situation you may consider fixing your rate so you know what your repayments will be for a set period of time.

Factors that determine the rate

As a general rule of thumb the best variable rates are usually offered to borrowers who are considered low risk or who fit the criteria for the type of loans that a lender is wanting attract.

Factors that determine the variable interest rate that will apply to your loan include:

  • Having good equity: Home loans with an LVR (Loan to Value Ratio) below 80% are considered lower risk and are often automatically qualify for lower interest rate. Also the more equity you have the better position you will be in to negotiate to reduce the rate even further.

  • Strong credit history: Your credit report will play a big part when lenders assess your application. You may not qualify for some loans if you have lots of enquiries and hiccups like defaults and missed payments. It is usually a minimum requirement for the lowest interest rate loans to have a credit history without a blemish.

  • Loan size: The amount you borrow could affect what interest rate a lender offers you. Larger loans are usually more profitable for lenders, so they may offer cheaper rates for loans between certain tiers.

    Listed below are the typical tiers for different loan sizes.

    • $150k - $250k
    • $250k - $500k
    • $500k - $750k
    • $750k+

Quick Tip

The higher the tier your home loan fits into the better position you will be in to be offered a special rate or to negotiate the rate with the lender. On the flip side, loans below $150k are usually not given any special treatment.

  • Interest only: If you are wanting interest only repayments, the interest rate you are offered may be higher than if you choose principal and interest. This has happened as a result of the APRA changes targeting investment lending. Lenders have also tightened requirements around the number of years you can have interest only repayments, especially if it is an owner occupied home loan.

  • Principal & interest: These loans now tend to attract the lowest interest rates so be sure to shop around. Apart from securing a competitive rate, you will have the satisfaction of knowing that you are paying off your home over the term.

  • Owner occupied & investment: Since the APRA changes, a lot of lenders are offering different interest rates depending on whether the loan is categorised as owner occupied or investment. Investment loan interest rates now tend to be higher. If it is an investment loan it is important to shop around to find the best variable rate home loan.

Loan features to expect

Loan features provide greater flexibility for borrowers. These features cannot only help borrowers save more and repay their home loan sooner, but it gives them more opportunities to better manage their money. Some loan features you can expect include:

  • Offset account

    An offset account is like a savings account that is linked to the loan. When interest is calculated the funds in the offset account and added to the loan so that interest is calculated on the lower amount. In effect you are not earning interest on your spare cash but reducing the interest being charged on your loan increasing your equity. A number of loans that offer offset account come with an annual fee but there are a number of basic loans that also have it as a feature.

  • Flexible repayments

    Having the ability to pay extra and also being able schedule repayment to a frequency that suits you like weekly fortnightly or monthly, can help with budgeting as well as paying your home loan off quicker.

  • Free redraw

    Encourages you to pay as much extra as you can with the peace of mind knowing that you are able to access these extra repayments if you need to for free.

  • Portability

    If your loan is portable, you are able to sell your home and purchase a new one without having to change loans. In effect the loan stays the same but lender releases your current home as security for the loan and replaces it with the new property.

  • Portions

    If your loan can be divided into portions, you are able to separate out different types of debt or have your loan split between a fixed or variable rate.

Upfront and ongoing fees

Different lenders will have different fees. Here are some of the upfront and ongoing fees you should be aware of:

  • Establishment fees: There are costs involved in setting up a home loan that lenders can pass on. These include the cost of a valuation on the property, legal fees to get the loan contract drawn up and processing fees. Some loans have no setup fees, some will pass on some of these costs and others will charge a set amount to cover these and call it an application fee.

  • Annual or monthly fees: Some loans have regular fees that can come with features like an offset account and/or a discounted interest rate. You need to work out the savings you are receiving from the lower rate and offset account for your loan amount, to make sure it is worthwhile.

  • Redraw fees: With some lenders redraw will be free while with others it may cost or there may be restrictions around how much and how often you can access it. Be sure to ask lenders how their redraw works.

  • Lenders Mortgage Insurance (LMI): LMI is a cost that is passed on to the borrower when you borrow more than 80% of the value of the property. What most people don’t know is it is not transferrable so if you want to refinance and you still owe more than 80% it will be charged again. This cost often makes it not worthwhile to change lenders.

Tips to compare loans

  1. Do a Google search or check out comparison sites on the internet is a great place to start researching the best variable rates available. Comparison sites can list a number of loans in one place and you can search online to uncover more options.

  2. Speak to different lenders about their home loan options as well as the application process. Take note of what features and fees apply to the loan so that you can compare them against the other loans you are interested in.

  3. Get a Key Facts Sheet for each loan you are interested. It is a great way to compare home loans side by side . It will give you a personalised comparison rate which includes the ongoing fees and interest rate for your specific loan amount. This personalised comparison rate will help you compare a number of loans from different lenders.

  4. For a Key Facts Sheet for a State Custodians loan Click Here

  5. The customer service you receive can make a huge difference to the application process. Take note of how long it took for the lender to respond. Were they knowledgeable and answer your questions professionally and accurately?

Quick Tip

A mortgage broker may be able to help but be aware that they are only able to advise on loans listed on their panels. There are a number of lenders who do not offer their loan via a mortgage broker, so if you are only relying on their recommendations, you could miss out on a wide range of loans available outside the broker’s panel.

At State Custodians, we have the products and expertise to help you find the best variable rate home loan. Lending Specialists work hard to find the most competitive home loan options for you and can give you all the information you need to make an informed decision.

Just call on 13 72 62 or leave your details here and they will contact you.