Top 8 Benefits of Variable Rate Home Loans in Melbourne

Variable rate home loans are a smart choice for many Melbourne homeowners and investors, offering flexibility and the potential for cost savings. But navigating the world of mortgages can be complex, especially when interest rates fluctuate. 

This is where mortgage brokers come in. With their industry expertise, brokers can help you understand the benefits of a variable rate home loan, tailor options to your financial circumstances, and guide you through the loan application journey. 

Ready to learn more? Let's dive into the key advantages of choosing a variable rate home loan.

What Is a Variable Rate Home Loan?

A variable rate home loan is a type of mortgage where the interest rate can fluctuate over time. Unlike fixed-rate loans, where the interest is locked in for a set period, variable rate loans respond to changes in the market, including shifts in the Reserve Bank of Australia’s (RBA) cash rate. This means your monthly repayments can go up or down depending on these changes.

For example, if the RBA lowers the cash rate, the interest on your variable home loan may decrease, leading to lower monthly repayments. Conversely, if the cash rate rises, your repayments could increase.

Why Choose a Variable Rate Home Loan?

Choosing a variable rate home loan offers several advantages, particularly in a dynamic market like Melbourne. Here’s why so many Australians prefer this loan type:

1. Potential for Lower Interest Rates

Variable home loan rates often start lower than fixed-rate home loans, leading to smaller monthly payments right from the beginning. This can make it easier to manage your budget during the initial period of time, offering immediate cost savings.

2. Flexibility with Extra Repayments

One of the standout benefits of a variable interest rate loan is the ability to make extra payments without facing repayment fees. This flexibility means you can pay off your loan principal faster, reducing your loan term and saving on interest over the life of the loan.

If you come into some additional funds, you can chip away at your loan balance more quickly.

3. Access to Redraw Facilities and Offset Accounts

Variable rate loans typically come with useful features like a redraw facility and an offset account. These loan features allow you to reduce the interest you pay by offsetting your loan amounts with savings, while also giving you the ability to access extra repayments if needed.

This can offer additional certainty and financial flexibility during your loan journey.

4. No Break Costs

Unlike a fixed-rate home loan, variable loans usually don’t carry break fees if you choose to refinance or pay off your loan early. This gives you the freedom to adapt your loan contract to your changing financial circumstances without incurring extra costs.

5. Adjusts to Market Conditions

A variable home loan rate adjusts according to shifts in the broader economic climate. During periods of economic downturn, when funding costs drop, your loan interest rate might decrease, leading to lower loan repayments.

This responsiveness to market conditions can be particularly advantageous over a longer loan period.

6. Competitive Comparison Rates

With variable loans, comparison rates often reflect the true cost of the loan, including additional features and fees. This transparency helps you make informed decisions when evaluating loan offers from different lending specialists.

It also allows you to find a competitive rate that aligns with your financial goals.

7. Easier Eligibility Criteria

Variable rate products often come with more lenient eligibility criteria compared to other loan types. This can make it easier for first-time buyers or those with less-than-perfect credit to secure an eligible home loan, especially in a city like Melbourne, where property prices are high.

8. Split Loan Options

For those seeking a balance between flexibility and stability, a split home loan is an attractive option. This allows you to split your loan into a variable portion and a fixed-rate portion, giving you the best of both worlds.

You can enjoy the benefits of a locked-in rate for part of your loan while still taking advantage of lower rates on the variable portion.

Melbourne Property Market 2024: The Current Landscape

As of 2024, Melbourne’s property market remains one of the most active and resilient in Australia. Despite recent challenges, including fluctuating interest rates and changes in government policies, the city continues to attract both local and international buyers.

According to recent data from CoreLogic, Melbourne’s median house price is approximately $900,000, with unit prices around $600,000. These figures represent a slight increase from previous years, reflecting steady demand despite the broader economic uncertainties.

For variable rate loan holders, these market conditions underscore the importance of flexibility in managing repayments. With property prices continuing to rise, having the ability to adjust your loan terms and take advantage of lower interest rates can make a significant difference in your long-term financial planning.

Case Study: Sarah’s Journey with a Variable Rate Home Loan

Let’s look at a real-world example to illustrate the benefits of a variable rate loan.

Meet Sarah: A 35-year-old marketing manager who recently purchased a home in the Melbourne suburb of Brunswick. Sarah decided on a variable rate home loan for her $750,000 property. Her initial interest rate was set at 4.2% per annum.

The Scenario: A few months after settling into her new home, the RBA announced a reduction in the cash rate by 0.25%. As a result, Sarah’s loan interest rate dropped to 3.95%, reducing her monthly repayments from $3,678 to $3,558—a savings of $120 per month.

Additional Repayments: With the extra cash, Sarah decided to make additional repayments of $200 each month. By doing this, she’s on track to pay off her loan 5 years earlier, saving herself thousands of dollars in interest over the life of the loan.

The Result: The flexibility of a variable rate home loan allowed Sarah to adjust to the changing market conditions, save on her monthly repayments, and reduce her overall loan term. If she had chosen a fixed-rate loan, these opportunities would have been limited.

Understanding Split Loans: A Flexible Approach

For those seeking a bit more certainty, split loans offer a middle-ground solution. A split loan allows you to divide your mortgage between a fixed-rate portion and a variable rate portion. This way, you can enjoy the stability of a fixed-rate loan while also benefiting from the flexibility of a variable rate.

Example of a Split Loan: 

Imagine you have a $500,000 mortgage. With a split loan, you might decide to fix $300,000 at a locked-in rate of 4.5% for five years, while the remaining $200,000 remains on a variable rate of 3.8%. If the cash rate drops, your variable portion will see reduced repayments, but the fixed portion will remain unchanged, giving you a blend of predictability and flexibility.

Split loans can be particularly useful in uncertain economic climates, where interest rates might rise or fall unpredictably.

FAQs

What is the main advantage of a variable rate home loan? 

The primary advantage is flexibility. Variable rate loans typically offer lower starting interest rates and allow you to make extra repayments without penalties.

Are there any downsides to a variable rate loan? 

The main risk is that your interest rate can increase if the market rates rise, leading to higher monthly repayments.

Can I switch from a variable rate to a fixed rate? 

Yes, most lenders allow you to switch, but it's important to check for any associated fees or conditions.

What is a redraw facility? 

A redraw facility allows you to access extra repayments you've made on your loan. This can be a handy feature if you need funds for unexpected expenses.

How does an offset account work? 

An offset account is a transaction account linked to your home loan. The balance in this account reduces the amount of interest you pay on your loan.

What happens if the RBA increases the cash rate?  

If the RBA raises the cash rate, your variable interest rate will likely increase, which means your monthly repayments could go up.

Is a variable rate loan suitable for first-time buyers? 

Yes, particularly if you're looking for flexibility and the potential to save on interest with extra repayments. However, it's important to consider whether you can manage potential rate rises.

Conclusion: Is a Variable Rate Home Loan Right for You?

Choosing the right type of loan is a significant decision that depends on your financial circumstances, personal goals, and tolerance for risk. Variable rate home loans offer great flexibility, the potential for savings, and the ability to adapt to market conditions. 

Ready to explore your options? Reach out to a trusted mortgage broker to discuss how a variable rate home loan can work for you. For tailored advice, visit our website or give us a call at 0423 713 362. Your path to homeownership is just a conversation away!