How to find the best variable home loan rates

Variable rate home loans tend to offer borrowers more features than fixed rate home loans. While the types of features available will often differ from one loan product to the next, they may include the following:

• Offset account

An offset account is a savings or transaction bank account that is linked to your mortgage. It works just like a standard bank account, but gives borrowers the opportunity to reduce their payable interest. The funds you deposit into your offset account help to 'offset' or reduce the interest owing on your mortgage. For example, if you have $250,000 owing on your mortgage, and $50,000 in your offset account, you would only be charged interest as if you had a loan balance of $200,000.

• Extra repayments

Some home loans may not allow you to make additional repayments on top of your monthly repayments without charge, and fixed home loans often have a limit. But, variable rate home loans tend to have more flexibility. Making extra repayments onto your mortgage could get you ahead of schedule and come closer to making an early exit from the home loan, reducing the total interest repayments you’d make, and shaving years off your loan term. 

• Redraw facility

A redraw facility allows you to withdraw any additional home loan repayments you’ve made, subject to the lending criteria. It enables you to work towards paying down your loan faster and reducing your interest charges, with peace of mind that you can access those extra funds if you need to. The amount you may withdraw can be capped by some lenders, so be sure to read the terms and conditions first.

• Home loan packages

Some lenders will package home loans with other financial products, like credit cards, transaction accounts or a line of credit. A home loan package could save you money, as you will typically only be charged a single loan account fee (or annual package fee) to cover all of the products within the package.

• Cashback

You may even be able to nab some extra cash when you sign up for a home loan or refinance through cashback deals. This is where a lender entices you to join with them by providing you with cash as sign-up perk (typically around $2,000 - $3,000). Your cashback offer can be used to chip away at your loan debt, cover the cost of refinancing, or simply go towards a new appliance you've been coveting. 

Most home loans have loan terms of 25 or 30 years, and a variable home loan will have a variable interest rate from day one. In contrast, a fixed rate home loan will have a set interest rate for the first one-to-five years of the loan term, before it reverts to variable for the remainder of the term - unless you refinance to another fixed rate home loan.

Keep in mind that over a 25-30 year loan term, it is expected that interest rates will fluctuate. For more information on how interest rates on home loans are influenced, and whether or not your repayments are set to rise or fall, please read check out our Reserve Bank of Australia cash rate Tracker Page.

Whether a variable rate home loan is the right choice for you will depend on your individual financial situation and the kind of home buyer you are.

• If you are a first home buyer:

Variable rate home loans may offer more flexibility, but the added security offered by fixed rate home loans can appeal to borrowers who are first getting into the property market. A set interest rate can provide certainty and may help simplify your budgeting while you focus on building up your equity.

• If you are an investor:

Variable rate mortgages often appeal to property investors, because if interest rates stay low, their repayments can remain relatively affordable, allowing them to maximise the return on their investment property. Plus, access to features such as offset accounts and redraw facilities on your investment loan can help to further minimise interest repayments.

• If you are refinancing:

Whether you’re refinancing an investor or owner occupier home loan, you may wish to consider a variable rate mortgage to help keep your repayments down, as well as potentially gain access to other cost-saving features.

When comparing your home loan options, it's important to look at more than just the interest rate that's on offer. Here are some important factors to consider:

• Deposit options

You’re often more likely to enjoy lower variable interest rates on your mortgage if you can afford a larger deposit on your property. This added security helps to reduce the lender’s risk. The deposit size required for a mortgage varies by lender, but 20 per cent is considered the ideal loan size for nabbing a more competitive loan option.

If you can’t afford a full deposit on the property you want, there may still be home loan options available to you. Some lenders offer mortgages with a high loan to value ratio (LVR), where you pay a smaller deposit and borrow a greater percentage of the property’s value. However, your lender may require you to pay Lender’s Mortgage Insurance (LMI) to keep them protected in case you default on your loan.

Alternatively, you may be able to have a parent or other close relative serve as your guarantor, using the equity in their property to guarantee your home loan in lieu of a deposit. This option can allow you to sidestep LMI, though it may also put the guarantor’s finances at risk if you were to default.

Keep in mind that, depending on your state or territory and whether you're a first home buyer or not, you may have to pay stamp duty on your property. This can range in the tens of thousands of dollars, so factor this potential cost into your deposit budget.

• Loan term

Most home loans have terms of 25 or 30 years, though shorter and longer home loans may also be available. When deciding on the length of your loan term, it’s important to remember that the longer it is, the more affordable your repayments might be, but the more you'll pay in interest charges.

Further, if you choose an interest-only home loan, choosing to only pay interest for a set period of time will mean you're not reducing your principal at all in that period. For that reason, many borrowers opt for principal & interest loans to chip away at their loan amount. Shorter home loans allow you to get your property fully paid off more quickly by paying a greater percentage of the principal each month. While this can make your repayments more expensive, you’ll likely pay less in total interest over the lifetime of your loan.

• Introductory rates

Another thing to keep in mind is that lenders may offer introductory variable home loan rate discounts, or honeymoon rates, as special offers to entice new borrowers onto their books. The introductory period may even include perks like fee waivers, cashback offers and more. 

After a set period of time, these introductory rates will then revert to a generally higher standard variable rate. If you choose a home loan offering a low introductory rate, ensure you know not only the exact period of time of this honeymoon period, but also what the lender's standard variable rate is. This way you can consider refinancing to a new, low rate loan once this period has ended if you find the ongoing rate is too high.