Variable Rate Home Loans

Many variable home loans come with rate tiers, which means that the borrower will be offered a different rate depending on what criteria they meet. For variable rate home loans, there are two main conditions that could influence the rate you end up with: how much you are borrowing and your loan-to-value ratio. Sometimes it can be a combination of both factors.

Loan amount: Lenders traditionally reserve their most competitive rates for customers who borrow more money. So the higher your loan amount, the more competitive the interest rate may be. Each lender will have their own rate tier structure but as a general rule of thumb, package discounts kick in when you are borrowing more than $150,000, with the size of the discount increasing in line with the size of your loan.

Loan to value ratio. The other factor that could affect your home loan rate is the loan-to-value ratio or LVR. Some loans have LVR requirements of 80% and below to qualify for the most competitive rate. This means that you will need to have at least a 20% deposit or equity stake in the property to get the home loan. There has also been a growing trend of lenders introducing even more competitive rates at lower LVR tiers of up to 70% or 60%. On the flipside, if you haven’t saved up a big deposit, some loans will allow you to borrow up to 90% or 95% of the property value. But this increased risk to the lender means that you may have to pay a higher interest rate and also be required to bear the hefty cost of lenders mortgage insurance.

Both fixed and variable rate home loans will have their pros and cons. As a borrower, it’s important not to try and ‘time the market’ but rather to review all options carefully and choose one that is going to best suit your financial situation or comfort level. 

For instance, if you are nervous about the impact that a rate rise will have on your household finances, then opt to fix some or all of the loan. A key advantage of fixed rate home loans is that your repayments won’t change over the term of your loan, making budgeting easier. 

However if flexibility matters more to you than certainty, then a variable rate home loan may be more suitable. The pros of a variable interest rate include: 

• Lower repayments if interest rates fall

• Extra features such as an offset account and the ability to make unlimited fee-free extra repayments, which can save you money over the life of your loan.

Then what about if you want the best of both worlds? Some lenders give borrowers an option to split their home loan between a fixed rate and a variable rate. This allows you to lock away a portion of your home loan to protect yourself if interest rates rise, but you also get to use the variable portion of your loan to get the most out of flexible features.

Variable rates tend to follow the fluctuations of the broader economy. If market interest rates drop, the variable rate charged on your home loan may also drop. On the flipside, if market rates rise, your lender may hike up your variable rate to match.

This is exemplified whenever the Reserve Bank of Australia (RBA) reduces the official cash rate. Many lenders follow suit by passing the full cut or a partial cut onto your home loan. It’s worth noting though that such a move isn’t compulsory; instead it’s recommended and can help the lender stay competitive. 

With this in mind, taking out a variable rate home loan does mean you’ll have to prepare for possible increases in interest rates, but it also means that you could benefit from any interest rate cuts that you might not have with a fixed rate home loan.

The key reason to take out a full feature home loan is to benefit from more flexibility in how you make your repayments, which could also help you budget better and save on interest. Full feature home loans often include an offset account facility, an unlimited number of free extra repayments and  free redraws.

At a minimum, this type of home loan usually comes with a free redraw facility and free extra repayments. This combination is great because you can put every spare dollar towards your mortgage and shorten the life of your loan, while the redraw facility allows you to get those funds back if you really need them.

An offset account is a transaction account that is linked to your home loan. Having this type of account means you could pay less interest on your home loan. The funds in the transaction account are offset daily against the balance of your home loan and you are only charged interest on the difference between the two.

For example, if you have a home loan of $400,000, you’ve already paid off $80,000 and you have $200,000 in an account that is being 100% offset, you would only pay interest for $120,000 of your loan. This means that you would be paying less interest, as you are being charged interest on a smaller amount.

One thing to keep in mind when searching for a competitive variable interest rate home loan is that you will probably have a lot of options. Certainly more options than you may have had, say, 10 years ago.

This is definitely a good thing, because it means you can be more choosy and you won’t be restricted to what the big four banks have to offer. These days you can take out a home loan with a credit union, an online bank, a neobank and even a dedicated online home loans lender.

An online bank or lender will often have a much more competitive interest rate to offer, as it has never had to deal with the overhead costs that come with having a physical branch.

Of course while a great price is worth chasing after, it is also good to make sure you’re getting all the features and flexibility you need for that price. So when you’re comparing home loans, make sure you’re comparing the whole package, including price, features and flexibility.

If you're looking for one of the most competitively priced variable rate home loans in Australia, then our annual Mozo Experts Choice Home Loan Awards is a good place to start your search. In the 2021 awards, our expert judges assessed 304 variable rate owner occupier home loans for the Low Cost Home Loan category in order to find the best of the bunch. Investors weren't left off the table either, with 249 variable rate investment loans considered for the Investor Home Loan category. 

Now that you've read up on all the things you'll need to consider when choosing a variable rate home loan, now's the time to compare your options and this is where the tools on our site come in.

First up is the market snapshot table which lists some of the current top home loan deals available from a range of lenders. You'll find this at the top of this page.

If you want to delve deeper and compare all the home loans in our database - that's over 400 home loans - use our home loan search tool which will find options based on your requirements including interest rate type, your borrowing size and the value of your property. 

If you are refinancing and looking to switch home lenders we also have a tool specifically designed for you. Our free online Switch & Save Calculator compares your existing home loan against the market and gives you a personalised report showing you which home loans will save you the most in interest and fees if you switch.

Another unique element of our site is that you can also read up on real customer experiences with our home loans ratings hub. We've got customer reviews of major banks, credit unions even online lenders like UBank and Loans.com.au. If you want the experts' opinion, head on over to our Experts Choice Home Loans Awards page for our top picks of the best value home loans in the market.

And for the number lovers out there we've got a range of home loan calculators that you can play around with until your heart's content. We can help you work out how much you can afford to borrow to how much your repayments could be depending on the term of the loan.

Finally, you can prepare for a rate rise with our rate change calculator, which will calculate your actual monthly repayments, should interest rates go up.

If you want more information to help you make an informed decision, head on over to our guides section.