What is a variable rate home loan?
A variable rate home loan is a home loan where your interest rate will move up or down over the loan term. Interest rate fluctuations can happen at any time according to the lenders' wishes but they generally occur in line with changes to the official
cash rate, which is set by the Reserve Bank of Australia (RBA). For example, if the official cash rate falls, it’s likely your lender will drop their home loan interest rates as well (and vice versa if the official cash rate rises).
Variable rate home loans can be more difficult to budget for than a fixed loan because you have to take into account potential rate rises or falls, which will impact your repayment amount.
Why choose a variable rate home loan?
In Australia, variable rate home loans are more popular than fixed rate home loans among borrowers.
Variable rate home loans can be more preferable to fixed rate home loans because they offer more flexibility. Variable rate home loans are generally more likely to offer appealing features like a redraw facility, offset account, or the ability to make
extra repayments to help you pay off your loan sooner.
Variable rate home loans can be more preferable to fixed rate home loans if the official cash rate is falling as it means there’s a good chance your lender will also drop your home loan interest rate. If you were on a fixed interest home loan, you would
miss out on these rate cuts during your fixed term. However, if you’re on a variable rate home loan and the official cash rate rises, it’s likely your lender will also then increase your home loan interest rate - whereas if you were on a fixed rate
loan, your rate would stay the same.
Variable vs fixed rate home loans
Because interest rates on variable home loans fluctuate over the life of the loan, variable home loans can provide less certainty than fixed loans as you have to take into account interest rate rises or falls. However, fixed home loans aren’t without
their downsides either, which include:
- Costly break fees which can amount to thousands of dollars if you choose to leave the loan before the fixed term is up
- You can miss out on interest rate cuts
- Many fixed home loans don’t offer redraw facilities or offset accounts
- High revert rates
Frequently asked questions
1. Is it better to have a fixed or variable home loan?
If interest rates are on the decline, it could make more sense to have a variable interest rate so you can benefit from rate drops. However, if interest rates are currently low but likely to rise in the near future, it could make more sense to lock in
that lower rate with a fixed mortgage.
Fixing your interest rate can be a bit of a gamble because you’re essentially taking a bet on whether your lender will increase or lower your rate.
2. Are variable rates higher than fixed rates?
Not necessarily - variable rates can rise or fall depending on what’s happening with the official cash rate, so they may not always be higher than fixed rates. In fact, historically variable rate home loans have generally been lower than fixed, but this
has changed a bit over the last few years with interest rates falling to historic lows. If fixed rates are lower than variable rates, it’s likely it means the lender expects rates to remain low for some period.
3. Can you pay off a variable home loan early?
You can pay off a variable home loan early by making extra or early repayments, which could potentially save you thousands in interest over the life of the loan. Unlike fixed home loans, you won’t be charged an early exit free for repaying your variable
mortgage off early.
4. How often do variable mortgage rates change?
Variable mortgage rates are subject to change at the lenders' discretion but generally fluctuate in line with any changes the Reserve Bank makes to the official cash rate.
5. Can I change my mortgage from variable to fixed?
Refinancing from a variable home loan to a fixed loan is much simpler than refinancing from fixed to variable, which can attract hefty break costs and discharge fees.