Variable rate mortgages explained
Variable rate home loans feature interest rates that fluctuate based on changes in the market interest rates. Unlike fixed rate loans, where the interest rate remains constant for a predetermined period, variable rate loans are subject to periodic adjustments.
What are the benefits of a variable rate?
Lower initial rates: Variable rate loans often start with lower initial interest rates compared to fixed rate loans, which can translate to lower initial repayments and potential cost savings, especially in a low-interest-rate environment.
Potential for rate decreases: If market interest rates decrease, borrowers with variable rate loans may benefit from lower interest rates and reduced monthly repayments.
Flexibility: Variable rate loans typically offer more flexibility than fixed rate loans, allowing borrowers to make extra repayments without facing penalties or exit fees.
Additional features: Variable rates mortgages may come with added features such as an offset account. Chat to your broker to determine what features are available based on the lender.
What to consider about a variable rate
Despite their advantages, variable rate home loans come with certain considerations:
Interest rate risk: The main drawback of variable rate loans is the exposure to interest rate risk. If market interest rates rise, your monthly repayments could increase, potentially putting strain on your budget.
Budget uncertainty: Unlike fixed rate loans, where repayments remain constant, variable rate loans introduce uncertainty into your budgeting process, as repayments can fluctuate with changes in interest rates.
Financial stability: If you prefer stability and predictability in your finances, a variable rate loan may not be the best option, especially if you're concerned about potential increases in interest rates.
Fixed, variable rate or split rate?
Choosing between fixed, variable, or split rate loans depends on your individual circumstances, risk tolerance, and financial goals.
Fixed rate: You might opt for a fixed rate if you prioritize stability and want protection against potential rate rises. Generally suitable if you plan to stay in your property for the duration of the fixed term.
Variable rate: Variable rate loans offer more flexibility and may be beneficial if you anticipate interest rates to decrease or if you plan to make extra repayments.
Split rate: A split rate loan allows you to “have the best of both worlds” by dividing your loan into both fixed and variable portions, providing a balance between stability and flexibility.
In conclusion, variable rate home loans offer flexibility and potential cost savings, making them an attractive option for many borrowers. However, it's essential to weigh the benefits against the potential risks and consider your individual circumstances before making a decision.
Whether you opt for a fixed, variable, or split rate loan, conducting thorough research and seeking professional advice can help ensure you make the right choice for your financial future.