What is standard variable rate?
A variable rate home loan is a type of mortgage where the interest rate can change over time. This means that your monthly payments can go up or down based on market conditions and decisions made by your lender. Typically,
lenders look at factors like the Reserve Bank of Australia’s decisions and general market trends when deciding whether to adjust interest rates.
How It Works:
When you take out a variable rate home loan, you agree to a rate that can fluctuate. For instance, if the Reserve Bank lowers interest rates, your lender may also reduce your rate, meaning your monthly payments could decrease. Conversely, if rates rise, you might find your payments increasing. Variable rate loans often come with more features compared to fixed rate loans. These features can include:
- Offset Accounts:
These allow you to link your savings account to your mortgage. The money in your offset account reduces the amount of your loan that interest is calculated on, potentially lowering your overall interest costs. - Redraw Facilities:
If you make extra payments on your mortgage, you can often withdraw those extra funds later if needed. This can be useful for unexpected expenses. - Packaged Extras:
Some lenders offer additional products like credit cards or everyday banking accounts as part of the package with your variable rate loan.
While these features can be beneficial, they often come with fees, so it’s important to understand the costs involved.
Pros of a Variable Rate Mortgage:
Flexibility:
One of the biggest advantages of a variable rate loan is the flexibility it offers. You can often make additional repayments without penalty, helping you pay off your mortgage faster and save on interest. Using an offset account can further reduce your interest payments.
Potential for Lower Payments:
If interest rates decrease, you could see lower monthly payments. This can be a big advantage if market rates drop during your loan term.
Helpful Features:
Variable rate loans usually come with features that can help streamline your finances. For example, having an offset account linked to your mortgage can make managing your money easier and save you money on interest.
Bundled Products:
Many lenders offer packaged deals that include extras like credit cards or bank accounts, making it convenient to manage all your financial products in one place.
Cons of a Variable Rate Mortgage
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Potential for Higher Payments:
The flip side of the flexibility is the risk of rising interest rates. If your lender raises rates, your monthly payments could increase, making your mortgage more expensive over time.
Uncertainty:
Because the interest rate can change, it can be challenging to budget. You may find it hard to predict your monthly expenses if rates go up or down significantly.
Higher Fees:
While variable loans often come with appealing features, these can come with higher fees. It’s important to carefully review the costs associated with offset accounts, redraw facilities, and any bundled products.
In summary, a variable rate home loan offers flexibility and the potential for lower payments, but it also comes with risks like rising costs and uncertainty. When considering this type of mortgage, it’s important to think about your financial situation and whether you can manage the potential fluctuations in payments. Understanding the features and fees associated with variable rate loans can help you make an informed decision that aligns with your financial goals.