Variable interest rate
Repayment flexibility: Variable rate loans allow for a wider range of repayment options, including the ability to pay off your loan faster without incurring interest rate break costs. Some variable rate loans also offer features like offset accounts or redraw facilities that work to reduce the loan balance you pay interest on, while still allowing you to access surplus funds.
Easier to refinance: If you find a better deal elsewhere, it’s easier to switch to a different lender or home loan product if you’re on a variable rate, without attracting break costs.
You stand to pay less if rates fall: Lenders may cut rates for a variety of reasons, mainly in response to reduced funding costs. If you’re on a variable rate, this means you’ll reap the benefits of lower repayments.
You stand to pay more if rates rise: Lenders can change a variable interest rate at any time. For borrowers, this means their rate is likely to fluctuate over the life of their loan. If your bank raises rates, your repayments will also rise.
“The RBA’s cash rate is just one of the factors that drive funding costs for banks”, says Hall.
“Funding costs are also influenced by other factors, such as the rate at which banks lend to one another, the credit spread demanded by a bank’s wholesale investors and competition on deposit pricing. Prices may also be influenced by changes to capital requirements or significant cost changes.”
“It’s a complex mix of variables and a change in any of these components may cause banks to adjust their lending rates in either direction.”
“When you’re deciding on a home loan, it’s important to build in a buffer so you don’t face mortgage stress if variable rates rise.”
Cash flow uncertainty: Because rates can change at any time, it won’t be as easy for borrowers with a variable rate to predict cash flow over the long term. This inevitably means a variable loan requires more flexibility from the borrower. Making use of loan features including offsets and redraw facilities can help smooth out cash flow concerns, should unexpected events arise.