A variable rate home loan should be reviewed whenever your life changes, not only when your rate changes. The loan that suits you at 28 will rarely suit you in the same form at 48.
At Lexor Finance, we are a family-run Melbourne business, and we work with many households in Truganina and across Victoria. The sections below cover the three stages where we most often see a variable rate loan left unchanged for too long.
What Is a Variable Rate Home Loan and How Does It Work?
A variable rate home loan has an interest rate that your lender can raise or lower over time, which means your repayments can change. Lenders often adjust their rates after the Reserve Bank changes the cash rate, though they are not required to match it.
The cash rate is currently 4.85% p.a. Your lender's variable rate is set separately and depends on the lender, your deposit size and the loan product you choose.
The main benefit is flexibility. Many variable loans allow extra repayments and can be linked to an offset account. The main trade-off is that your repayments are not fixed, so a rate rise reduces your monthly budget.
Common Mistakes With a First Home Loan
The most common first-home mistake is borrowing to the limit your lender will approve rather than the amount you can comfortably repay if rates rise. Your borrowing capacity is a ceiling, not a target.
First home buyers often focus on the deposit and overlook the other costs. These can include Lenders Mortgage Insurance (LMI) when the deposit is small, as well as stamp duty and legal fees. First home buyers in Victoria may be eligible for concessions, but eligibility rules change, so check the current position with the State Revenue Office Victoria. Our first home buyers page explains how we approach this stage.
Before you apply, a borrowing capacity estimate gives you a realistic starting range. Home loan pre-approval then lets you shop with a clear budget. Pre-approval is not a final offer, and it can lapse or change if your circumstances or the lender's policy change.
Why Test Your Repayments Before You Commit?
Testing your repayments at a higher rate shows whether your budget can absorb a rise. A variable rate can move, so a loan that feels comfortable today may feel tight later.
As an example, consider a couple buying their first home who borrow $600,000 over 30 years. At an illustrative rate of 6.75% p.a., principal and interest repayments are about $3,891 a month. If the rate rose by one percentage point to 7.75% p.a., repayments would be about $4,298 a month. That is roughly $407 more each month.
The couple checked this figure against their household budget before choosing their loan amount. They decided to borrow slightly less and keep a buffer in their offset account. The result was a loan they could still manage if rates rose. The trade-off was a smaller budget for the property purchase.
You can run your own numbers with our mortgage repayment calculator.
Variable Rate Loan Features for a Growing Family
A growing family may benefit from a variable loan with an offset account and the ability to make extra repayments, depending on how much cash is held against the loan and what the feature costs. These features can let you hold spare cash against the loan while keeping it available for school fees, childcare or unexpected costs.
A linked offset account reduces the balance your interest is charged on. For example, if you hold $20,000 in offset against a $500,000 loan, interest is calculated on $480,000. The trade-off is that offset loans can carry a higher rate or an annual package fee, so it is worth checking whether the benefit outweighs the cost for your balance.
A split loan is another option. It places part of the loan on a fixed rate and part on a variable rate. This gives some repayment certainty, while the variable portion stays flexible. The fixed portion usually limits extra repayments and can attract break costs if you leave early.
This stage is also a good time to check you are not paying more than necessary. A loan health check can show whether your rate and features still suit you.
When Should You Refinance a Variable Rate Loan?
You should consider refinancing when your loan no longer suits your needs, or when your rate is high compared with what lenders are offering new customers. A rate gap that has grown over several years is a common reason to review.
Refinancing can also help when your circumstances change. You may want to consolidate debts, release equity for renovations or move to a loan with a more suitable feature set. We can compare options from lenders across Australia. Our refinancing team can explain what this involves.
Refinancing has costs. These can include discharge fees, application fees and, in some cases, LMI if your loan to value ratio is high. Any saving should be weighed against these costs.
Variable Rate Loans Nearing Retirement
Near retirement, the aim is usually to reduce the loan balance and keep repayments manageable on a lower income. A variable loan with an offset account can suit this, because savings reduce interest while staying accessible.
Two points are worth planning for. First, lenders assess your income at the time you apply, so refinancing is generally easier while you are still working. Second, decide how the loan will be repaid, whether through savings, downsizing or other assets. If superannuation is part of your plan, get advice from your accountant or a licensed financial adviser, because tax and super rules can affect the outcome.
If you are also considering buying an investment property, our investment loans page covers how those loans are structured.
Reviewing Your Loan at Every Stage
A review once a year, or after any major change, keeps your loan aligned with your goals. Triggers include a new baby, a change in income, a renovation or a new property purchase.
Our family-run team takes the time to understand where you are now and where you want to be. Call one of our team or book an appointment at a time that works for you, and we will look at your home loan options together.
Frequently Asked Questions
What is a variable rate home loan?
A variable rate home loan has an interest rate that your lender can change over time, so your repayments can rise or fall. It usually offers flexible features such as extra repayments and offset accounts.
Is a variable rate suitable for first home buyers?
It can be, because it often allows extra repayments and offset accounts. The trade-off is that repayments can rise, so it is wise to test your budget at a higher rate before borrowing.
When should I refinance my variable rate loan?
Consider refinancing when your loan no longer suits your needs or your rate has drifted above what lenders offer new customers. Weigh the saving against costs such as discharge and application fees.
How does an offset account work with a variable loan?
An offset account holds your savings against the loan balance, so interest is charged on the lower amount. Offset loans can carry a higher rate or package fee, so check the cost against the benefit.
