Variable Rate Mortgage - Home Loan Basics

In the Australian mortgage market, banks and other lenders compete by offering various innovative home loan products in a bid to attract customers – either directly or through a mortgage broker. Variable rate loans make up the majority of mortgages in Australia. The word “variable” here refers to the mortgage rate charged on the money that you borrow. Note that the mortgage rate can change at any time, either increasing or decreasing. Generally, however, such a change occurs in response to movements in interest rates within the wider economy.

For a wholly variable rate mortgage, the lender determines the floating interest rate. For a bank bill rate loan, which is far less common, the interest rate is set by reference to the professional money market, via either a fixed margin or a variable margin. The interest rates on bank bill rate loans normally vary more frequently than on wholly variable loans.

The main determinant of a variable mortgage rate is the cash rate set by the Reserve Bank of Australia. When the Reserve Bank alters the official cash rate, most variable rates will change by a similar quantity. There are two common variable rate loans:

* Standard variable rate mortgage. This is the most popular type in Australia. Most of them have a term of 25 to 30 years and more features and flexibility than other types of loans.
* Basic or Budget variable rate mortgage. Although this type has fewer features and less flexibility than standard loans, the mortgage rate is typically about 50 basis points lower than on a standard loan.

However, in a fundamental sense, you can set the term of the loan for whatever duration you want. It could be one year, five, ten, thirteen years, and so forth. Each lending institution will have its own policy on maximum and minimum terms. The longer the term, the lower your periodic instalments will be, but over the whole period you will end up paying more interest.

The common variable rate mortgage, whether for a home or an investment, obliges you to repay both interest and principal; over time, the balance on the loan decreases until it is all paid.

There are two great advantages of variable rate loans over fixed rate loans. First, if interest rates fall, the mortgage rate will also fall. Second, you can pay off the loan in full, or in part, as quickly as you want. Unlike most fixed rate loans, there will be no financial penalty for repaying the loan earlier, generally speaking that is. Some institutions may charge a fee, which could be equivalent to “an additional one month mortgage repayment” for terminating the loan contract early.

A special type of variable loan is the ‘honeymoon’ or ‘introductory rate’ loan. This starts with a very low mortgage rate for the first year or two — designed to entice you with its incredibly attractive figure — which converts to a much higher rate for the rest of the term. The introductory rate may be fixed for the honeymoon period, or may be the type which can fall should rates move downwards.

Mortgage Related Resources

* Aussie Home Loans - Request a free mortgage broker apointment
* Fast, Simple & Free Home Loan Comparison Report

Also see our article:

Tips to reduce your home loan by 10 years

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