Variable Rate mortgage

Definition

A variable rate mortgage refers to a loan where the interest rate will change from time to time as opposed to a fixed rate mortgage where the interest rate stays the same for an agreed period. If your rate changes, your minimum repayments will also change. The table below demonstrates the changes to minimum repayment for different loan amounts.

Loan Amount	Rate Change	Change to fortnightly repayments	Change to Monthly Repayments
$100,000	0.25%	$9.62	$20.84
$200,000	0.25%	$19.23	$41.67
$300,000	0.25%	$28.85	$62.50
$400,000	0.25%	$38.46	$83.33
$500,000	0.25%	$48.08	$104.67

Variable rate mortgages are typically influenced by changes to the target cash rate set by the Reserve Bank of Australia (RBA), however in November 2007, various lenders increased their interest rates independent of the RBA. This behaviour continued into the early part of 2008, which created a great deal of rate uncertainty amongst consumers, however variable rates settled by April 2008.

You can view the past 10 years of target cash rate movements on our interest rates page.

Variable Rate Terms (duration)

Although you are likely to refinance your loan well before the term expires, you can stretch your repayment with most lenders between 5 years and up to 30 years. The typical term is either 25 or 30 years, although some lenders allow loan terms up to 40 years. The shorter the loan term, the higher your minimum repayments will be and the less interest you will pay.

Advantages

Variable rate mortgages offer the greatest range of flexibility in every way from repayment options, general loan features, mobility and interest saving features. Variable rate mortgages tend to work out more cost effective for most people who are able to cope with changes in repayments.

Disadvantages

The main disadvantage of a variable rate mortgage is that sudden, rapid rate increases can catch borrowers off guard, creating financial stress and resulting in the mortgage becoming difficult to afford. Although this is the only disadvantage, it can cause significant problems if you haven't allowed a buffer of 1% - 1.5% on repayments and end up falling behind in your repayments.

Beware of

Fees designed to hobble you. Some lenders have introduced deferred establishment fees which can also greatly reduce the mobility advantage (your ability to switch to more competitive options) due to the harsh penalties they impose. These fees are not included in the comparison rate and are usually not thought about or discovered by borrowers until it is too late. Other fees such as Lenders Mortgage Insurance and costly establishment fees can also erode the mobility advantage of variable rate mortgages.

Be guarded against advertisements comparing rates between 'standard variable' rates or loans. Generally speaking, standard variable is a benchmark rate that all lenders will discount well below. A lender that claims to have kept their rates below the banks standard variable is being clever with their advertising. This does not meant the loans they offer are the same, or that they will be more cost effective than their competitors. It's probably no surprise that these lenders are also the ones that have unreasonable deferred establishment fees.

Pricing

Variable rate mortgages usually attract a lower interest rate than fixed rates.

Popularity

In Australia variable rate mortgages are generally more popular than fixed rate loans..