What are variable home loan rates? A variable home loan rate is one where the rate at which you are able to borrow money varies on a regular basis. These variables include your income, how long you have your mortgage until it expires, your credit rating and the prevailing property market index. There are variable home loan rates that vary by a week, half a week or even just a day.
How will the variable home loan rates affect my monthly repayments? Variable home loan rates will change depending upon what the prevailing interest rates are at any given time. This means that although you might have a fixed repayment each month based upon the amount you have borrowed, if the rates drop overnight your repayments will drop overnight too. Although you may be able to make extra payments if you know the rates are likely to drop overnight, these extra payments will only help you if they improve soon after.
As with fixed home loans there are also the risks associated with variable home loan rates. The most obvious risk for a lender is that your income may fall over time and you may not be able to keep up with repayments. If your income falls you could be declared bankrupt, which would mean you would lose your home. It is important to remember that even if your fixed home loan rates fall overnight you will still be responsible for the remaining balance.
How are variable home loan rates determined? The Australian financial services industry has taken several variables into consideration when setting the rates that are charged. Among these factors are your financial profile, your employment status and the health of the national economy. Today, the leading service provider in Australia that has been closely studying these factors is the Australian Competition and Consumer Tribunal (ACCTT).
The ACCTT has developed a number of criteria that it considers when determining variable home loan rates. Factors that have been deemed to be important include: the stability of government; the dependability of the financial industry in Australia; and the extent to which any adverse changes are likely to affect the affordability of home loans. For each of these three items, the official cash rate is considered to be the most important factor affecting variable mortgage rates. The official cash rate is basically an estimate of the future payment of interest on a mortgage based on current market conditions. If this estimate turns out to be too low, then lenders are less likely to offer mortgages with variable rates.
There are three different types of mortgage – interest only, interest and repayment. Interest only mortgages result in the borrower paying only the interest on the principle. Repayment mortgages result in the borrower paying back a certain amount of principal at pre-set intervals over a set period of time. In both interest only and repayment mortgages, there are separate rates for borrowers that pay interest and principal. While the government generally prefers interest only mortgages because they provide a reliable repayment method, they recognize that this method has some disadvantages and are encouraging the introduction of standard variable home loans.
Variable home loan rates can either be set by the lender or introduced by government-sponsored institutions such as the Reserve Bank of Australia. The government often hands over the variable interest rates to lenders on request. The Reserve Bank has also adopted a policy of keeping loan rates below their base rate. If the base rate is negative, then the lender will pass on the variable home loan rates to customers.
In the recent past, many banks in Australia have been reluctant to change interest rates, particularly as Reserve Bank of Australia rates are still above the bank’s base rate. However, with the recent announcement of a stimulus package and the prospect of more monetary stimulus in the market, there is a good chance that home loan repayments may now be lowered. With these factors, variable interest rate loans may become more common across Australia. If you are interested in applying for a variable home loan, it is important to understand how much the loan will cost you and what your future repayments will be. Always take your time when looking around for the best deal and to negotiate with the lender well in advance of applying for any type of loan.