What is a Variable Rate Home Loan?
When you apply for a home loan, one of the first decisions you'll face is choosing between different interest rate structures. A variable rate home loan is a mortgage where your interest rate can move up or down over the life of the loan. Unlike a fixed interest rate home loan where your rate stays the same for a set period, variable interest rate loans fluctuate based on market conditions and changes made by your lender.
For current and former Australian Defence Force members, understanding variable home loan rates is crucial when planning to achieve home ownership or invest in property. As specialists working with the ADF community, we help members access home loan options from banks and lenders across Australia who understand your unique circumstances.
How Variable Interest Rates Work
Your variable interest rate is influenced by several factors, including the Reserve Bank of Australia's cash rate, your lender's funding costs, and broader economic conditions. When rates change, your home loan repayments will adjust accordingly. This means you could benefit from lower repayments when rates drop, but you'll also need to budget for potential increases.
Most lenders review their variable rates regularly. If you have an owner occupied home loan with a variable rate, any rate changes will typically take effect within your next repayment cycle. This flexibility is one of the key home loan features that distinguishes variable products from their fixed counterparts.
Key Benefits of Variable Rate Loans
Variable rate home loans come with several advantages that appeal to ADF members:
- Flexibility to make extra repayments: Most variable home loan products allow you to pay more than your minimum repayment without penalties, helping you build equity faster
- Access to offset accounts: Many variable rate loans include an offset account option, where your savings can reduce the interest charged on your loan amount
- Portable loan features: If you're posted to a new base, variable loans often allow you to transfer your mortgage to a new property without significant costs
- No break fees: Unlike fixed rate loans, you can refinance or pay out your loan early without penalties
- Potential rate discounts: Lenders may offer interest rate discounts for professional packages, including special rates for ADF members
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Book a chat with a Finance & Mortgage Brokers at Defence Loans today.
Understanding Home Loan Features
When comparing variable rate home loan packages, you'll encounter several features worth considering:
Offset Account Benefits: A linked offset account works like a regular savings account, but the balance is offset against your home loan. If you have $20,000 in your offset account and owe $400,000 on your mortgage, you'll only pay interest on $380,000. This arrangement can significantly reduce your interest costs while maintaining access to your savings.
Redraw Facilities: Most variable loans include a redraw facility, allowing you to access extra repayments you've made. This provides financial flexibility during unexpected circumstances, which can be particularly valuable given the nature of Defence service.
Principal and Interest vs Interest Only: Variable rate loans can be structured as either principal and interest or interest only repayments. Principal and interest loans help you build equity from day one, while interest only options might suit investment loans for ADF members who want to maximise tax deductions.
Variable Rate vs Fixed Rate Home Loans
Choosing between variable and fixed interest rate options depends on your personal circumstances and risk tolerance. Fixed rate loans provide certainty with locked-in repayments for one to five years, protecting you from rate increases. However, you'll miss out on potential savings if rates fall, and you'll typically sacrifice flexibility.
Many ADF members choose a split loan structure, dividing their loan amount between variable and fixed portions. This approach offers a middle ground - you'll have some protection if rates rise while still benefiting from variable rate flexibility and potential rate decreases on part of your loan.
If you're approaching your fixed rate expiry, it's worth reviewing whether staying variable or refixing suits your current situation.
Calculating Home Loan Repayments
Understanding your potential repayments is essential when considering a variable rate loan. Your repayments depend on:
- Your loan amount
- The current home loan interest rate
- Your loan term (typically 25-30 years)
- Whether you choose principal and interest or interest only repayments
Calculating home loan repayments helps you determine what you can afford and improve borrowing capacity by ensuring your income comfortably covers your commitments. Remember that with variable rates, your repayments can change, so building a buffer into your budget provides financial stability.
Special Considerations for ADF Members
As Defence personnel, you have access to specific home loan benefits that civilian borrowers don't. Many lenders recognise ADF service and offer:
- Higher loan to value ratio (LVR) options, sometimes up to 95% without Lenders Mortgage Insurance (LMI)
- Interest rate discounts for Defence personnel
- Flexible policies that account for Defence-specific income like allowances
- Understanding of frequent relocations and posting cycles
These advantages can help you achieve home ownership sooner and with lower upfront costs. Whether you're looking at your first home loan or buying your next home, variable rate options provide flexibility that suits Defence life.
When to Consider Refinancing
Your current home loan rates might not reflect what's available in the market. If you've had your variable rate loan for a while, conducting a loan health check can reveal opportunities to access lower rates or improved home loan features.
Home loan refinancing for ADF members can help you:
- Secure a lower interest rate and reduce repayments
- Access better home loan packages with enhanced features
- Consolidate debts to improve your financial position
- Release equity for renovations or investments
When you compare rates across different lenders, you'll often find substantial variations. Even a small reduction in your interest rate can translate to thousands of dollars saved over your loan term.
Getting Started with Your Home Loan Application
If you're ready to explore variable rate home loan options, taking these steps will help you move forward:
Get Home Loan Pre-approval: Pre-approval shows you how much you can borrow and demonstrates to sellers that you're a serious buyer. It also locks in your application at current rates while you search for property.
Compare Your Options: Don't settle for the first offer. We can help you compare rates and home loan products from multiple lenders to find the right fit for your circumstances.
Consider Your Long-term Plans: Think about your career trajectory, potential postings, and whether you might want to turn your home into an investment property later. Variable loans offer the flexibility to adapt as your situation changes.
Working with a mortgage broker who understands Defence service means you'll have someone who can access home loan options from banks and lenders across Australia while appreciating the unique aspects of ADF life. We help you secure your future through informed decisions about your home loan.
Whether you're pursuing your first property purchase or looking to refinance, variable rate loans offer flexibility and potential savings that align well with Defence careers. The key is finding the right loan structure and home loan features that match your goals and risk tolerance.
Ready to explore variable rate home loan options tailored to ADF members? Call one of our team or book an appointment at a time that works for you, and we'll help you find the right solution for your property goals.
