Variable Rate Home Loans Home Loans

Variable Rate Home Loans

When it comes to getting the right mortgage for your home, there are a number of choices that are available depending on a number of factors. Two of the more popular types of mortgages are fixed rate and variable rate. Each type has its advantages, but what exactly are variable rate home loans and how do they work in Australia?

What are Variable Rate Home Loans?

A variable rate means that the interest rates for your loan will change depending on the national lending rate and they offer more flexibility than their fixed rate counterparts. For many Australians, there are certain advantages that going with a variable rate loan offers, particularly when it comes to saving money assuming that the lending rates remain low.

While a fixed rate loan is set for roughly three to five years, a variable rate mortgage means that the interest rates may change after the loan has been signed. The Australian industry cash rate is what sets the interest level for the loan and many take advantage of the rates when the interest levels are very low.

However, there are some considerations that need to be made before jumping on a low interest variable rate loan.

The Risks and Rewards of Variable Rate Home Loans

This particular type of loan is certainly a very popular choice, especially when the lending rates are so low. This is particularly true when it comes to comparing the terms offered by different lenders who will often sweeten the loan with features such as the option to make extra repayments on your own schedule and redraw facilities that add to the flexibility as well.

However, the danger is that your repayment rate is subject to the fluctuations of the market which means that it makes it more difficult to budget. While the advantage is that if rates fall you will pay less, the problem becomes what happens when the rates rise. Even a small shift in the interest rate may mean hundreds, if not thousands of dollars over the course of the loan.

This is why many lending experts recommend that you allow for a 2% shift in the interest rate when taking out a variable rate home loan. While 2% may be a little extreme given the past several years of stability, predicting economic forces several years out can be difficult as there are many unforeseen factors. However, do have the option to split your loan over variable and fixed rates to provide more stability or simply go with a fixed rate loan for now and secure the next few years.

The more you learn about variable rate home loans, the better off you will be when it comes to getting a long-term loan to purchase property. For many Australians, the variable rate loan offers more advantages in terms of flexibility and the possibility of actually paying less on your monthly rate. However, that will have to be weighed by the possibilities of having the interest rates rise over the time of your loan as well.

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