Variable rates can move according to market conditions. They can vary up or down as the economy and/or the lender dictates. Variable loans are usually more flexible and allow customers to make extra repayments without any kind of penalty. They normally have either an offset facility or a redraw facility. This means that ultimately, they pay less interest while they have extra money in their offset or redraw facility. Customers can then withdraw the advanced funds from their facility at any time they need it. Fees and charges vary from bank to bank. Most Australians elect to have a variable home loan.
Some examples of Variable loans are;
- Standard Variable – this is the usual variable rate at a bank and may or may not attract fees;
- Discount Variable – these loans area usually called ‘basic loans’ and they generally do not have fees;
- Line of Credit – this is where you have a loan with a certain limit agreed to by the bank. Normally, the limit is set at an 80% LVR. Customers can use the available funds up to the limit agreed. It is like having a bank account with a huge overdraft. Investors or customers who are good at budgeting might find this type of loan to be a better option.
Fixed Interest Rates
A fixed rate means your rate is locked in at a certain interest rate and will not change for the duration of the fixed period. Generally, customers will take a 1, 2, 3 or 5 year fixed rate. Many banks will not allow you to pay extra while your home loan is on a fixed rate. So it is important to talk to your broker about what is possible.
Customers will tend to fix their home loan interest rate for the following reasons;
- If they believe that interest rates are moving upwards.
- If they want the security of knowing they will have the same repayment especially if they know their circumstances might change in that period of time. An example of this would be starting a family and only having one income for a while.
- A first home buyer might want the surety of knowing what their repayment is going to be for the first few years.
- A lot of investors take the mindset of set and forget. They fix their investment loan so they know what to expect for the foreseeable future.