When to Choose Variable Rates and Extra Repayments

Understanding Variable Rate Loans for First Home Buyers

If you're serving or have served in the Australian Defence Force and you're thinking about buying your first home, you've probably heard about variable rate loans. But what exactly are they, and how do extra repayments work? Let's break it down in a way that makes sense.

A variable interest rate means your interest rate can change over time based on market conditions and decisions by your lender. Unlike a fixed interest rate that stays the same for a set period, variable rates can go up or down. This might sound uncertain, but it comes with some real advantages that could work in your favour as a first home buyer.

The Benefits of Variable Rate Home Loans

When you're applying for a home loan as a first home buyer, understanding your home loan options is crucial. Variable rate loans offer several features that many ADF members find valuable:

• Flexibility with repayments: You can usually make extra repayments without penalty, helping you pay off your loan faster
• Offset account access: Many variable loans include an offset account that can reduce the interest you pay
• Redraw facilities: If you've made extra repayments, you can often access those funds if needed
• Potential interest rate decreases: When the market rate drops, so does your interest rate

For ADF members who might receive extra income from allowances or deployment pay, the ability to make extra repayments can be particularly valuable.

Making Extra Repayments Work for You

One of the most powerful features of variable rate loans is the ability to make extra repayments. Here's why this matters for your first home loan:

When you pay more than your minimum monthly repayment, that extra amount goes directly toward reducing your principal (the amount you borrowed). This means you'll pay less interest over the life of your loan and could potentially save tens of thousands of dollars.

Let's say you take out a home loan with a 5% deposit or even a 10% deposit. By making regular extra repayments - even small ones - you can significantly reduce your loan term and build equity faster in your property.

First Home Buyer Considerations for ADF Members

As an ADF member looking at your first home loan application, you might have access to some unique benefits. Understanding first home buyer eligibility and the various schemes available can help you get into the property market sooner.

Some key considerations include:

1. First Home Loan Deposit Scheme: This government initiative helps eligible first home buyers purchase a property with just a 5% deposit
2. Regional First Home Buyer Guarantee: Available for properties in regional areas, which might suit some ADF postings
3. First home buyer stamp duty concessions: These vary by state but can save you thousands
4. First home owner grants (FHOG): Additional financial assistance for eligible buyers
5. No LMI loans for ADF members: Special low deposit options that waive Lenders Mortgage Insurance (LMI)

Your first home buyer checklist should include researching these schemes and determining which ones you qualify for based on your service status and the property you're considering.

Setting Up Your First Home Buyer Budget

Before you apply for a home loan, it's important to understand what you can afford. Your first home buyer budget should account for:

• Your deposit amount (whether it's a 5% deposit, 10% deposit, or you're using a gift deposit from family)
• Ongoing loan repayments
• Property insurance and maintenance costs
• Any Lenders Mortgage Insurance (LMI) if applicable
• Stamp duty (unless you qualify for concessions)

If you're looking at low deposit loans for ADF members, you may also want to explore the first home super saver scheme, which allows you to save money through your super fund for your first home deposit.

Getting Pre-Approval for Your First Home Loan

Once you've done your research and established your budget, the next step is getting loan pre-approval. This gives you a clear idea of how much you can borrow and shows sellers that you're a serious buyer.

During your first home loan application, lenders will assess:

• Your income (including allowances and service-related payments)
• Your existing debts and expenses
• Your deposit amount
• Your employment history (military service counts as stable employment)
• Your credit history

ADF members often have stable employment and regular income, which can work in your favour when applying for a home loan.

Offset Accounts and Redraw Facilities Explained

Two features commonly available with variable interest rate loans are offset accounts and redraw facilities. Understanding these can help you manage your mortgage more effectively.

An offset account is a transaction account linked to your home loan. The balance in this account is offset against your loan balance, reducing the interest you're charged. For example, if you have a $400,000 loan and $20,000 in your offset account, you'll only pay interest on $380,000.

A redraw facility allows you to access any extra repayments you've made on your loan. This can provide a financial safety net while still helping you reduce your loan balance and interest charges.

Interest Rate Discounts for ADF Members

Many lenders recognise the stable employment and reliable income of ADF members and may offer interest rate discounts or special low deposit options. These interest rate discounts can add up to significant savings over the life of your loan.

When speaking with mortgage brokers who specialise in home loans for ADF members, ask about:

• Available interest rate discounts for defence personnel
• LMI waivers on low deposit options
• Package deals that include offset accounts
• Any special conditions or requirements

Making Your Decision

Choosing between a variable interest rate and a fixed interest rate depends on your personal circumstances, risk tolerance, and financial goals. Variable rates offer flexibility and the potential to benefit from rate decreases, while fixed rates provide certainty and protection from rate increases.

For first home buyers who value flexibility and want the option to make extra repayments without penalty, a variable rate loan often makes sense. This is especially true if you expect to receive irregular income or bonuses that you can put toward your mortgage.

Remember, you're not locked into this decision forever. Many ADF members review their home loan options regularly and may refinance to take advantage of better rates or features as their circumstances change.

Whether you're looking at your first home loan or exploring your home loan options, having support from specialists who understand the unique circumstances of ADF service can make all the difference.

Call one of our team or book an appointment at a time that works for you. We understand the unique financial situations of ADF members and can help you find a home loan solution that fits your needs. Contact us today or book an appointment to discuss your first home buyer journey.