What Are Variable Rate Loans?
When you're buying your first home, choosing the right home loan product is one of the most important decisions you'll make. A variable interest rate loan is a type of first home loan where the interest rate can move up or down over time, typically in response to changes in the official cash rate set by the Reserve Bank of Australia.
Unlike a fixed interest rate that stays the same for a set period, variable rates offer flexibility. This means your repayments can change, which requires careful budgeting. However, variable rate loans often come with features that can help you pay off your loan sooner, making them a popular choice among first home buyers.
Common Fees Associated with Variable Rate Loans
When you apply for a home loan, it's crucial to understand all the fees and costs involved. Here are the main fees you might encounter:
Application Fees
Many lenders charge an application fee when you submit your first home loan application. This fee typically ranges from $0 to $600 and covers the administrative costs of processing your application. Some lenders waive this fee as part of their home loan options, so it's worth comparing different products.
Valuation Fees
Lenders need to know the property's worth before approving your loan. Valuation fees usually cost between $200 and $400, depending on the property's location and value. This fee covers the cost of a professional valuer assessing the property you want to purchase.
Settlement Fees
Settlement fees (also called establishment fees) cover the cost of setting up your home loan. These typically range from $0 to $600 and are charged when your loan is ready to be drawn down.
Lenders Mortgage Insurance (LMI)
If you're applying with a 5% deposit or 10% deposit, you'll likely need to pay Lenders Mortgage Insurance. LMI protects the lender if you can't make your repayments. This can be a significant cost - sometimes tens of thousands of dollars - but it allows you to buy sooner without saving a 20% deposit.
The good news is that first home buyers in Queensland might qualify for programs like the Regional First Home Buyer Guarantee or the First Home Loan Deposit Scheme, which can help you avoid or reduce LMI costs.
Ongoing Fees and Costs
Monthly Account Keeping Fees
Some lenders charge monthly account keeping fees, typically between $0 and $15 per month. Over the life of a 30-year loan, this can add up, so factor this into your first home buyer budget.
Package Fees
If you choose a packaged home loan that includes features like an offset account or credit cards, you might pay an annual package fee ranging from $300 to $400.
Features That Can Save You Money
Variable rate loans often include helpful features that can reduce the total interest you pay:
Offset Account
An offset account is a transaction account linked to your home loan. The balance in this account offsets your loan balance when calculating interest. For example, if you have a $400,000 loan and $20,000 in your offset account, you'll only pay interest on $380,000.
Redraw Facility
A redraw facility lets you access any extra repayments you've made on your loan. This provides flexibility if you need funds for emergencies or renovations. Some lenders charge a small fee for each redraw (around $10 to $50), while others offer unlimited free redraws.
Interest Rate Discounts
Many lenders offer interest rate discounts for first home buyers or borrowers with larger deposits. These discounts can significantly reduce your repayments over time. When comparing home loan options, ask about available discounts and how to qualify for them.
Fees to Watch Out For
Early Repayment Fees
While variable rate loans typically don't have early repayment fees, it's important to check your loan terms. Some products may limit how much extra you can repay without penalty.
Switching Fees
If you want to change from a variable to a fixed interest rate (or vice versa), some lenders charge switching fees ranging from $0 to $300.
Discharge Fees
When you eventually pay off your loan or refinance to another lender, you'll likely pay a discharge fee. This typically costs between $150 and $400 and covers the administrative costs of closing your loan.
How to Minimise Your Costs
Here's a first home buyer checklist for reducing fees:
- Compare multiple home loan options from different lenders
- Ask about fee waivers for first home buyers
- Check your first home buyer eligibility for government schemes
- Consider low deposit options that reduce or waive LMI
- Investigate first home owner grants and first home buyer stamp duty concessions
- Use the First Home Super Saver Scheme to boost your deposit
- Get pre-approval to understand your borrowing capacity
Government Support for Queensland First Home Buyers
Queensland first home buyers can access several support programs:
- First Home Owner Grant (FHOG) of up to $15,000 for new homes
- Stamp duty concessions that can save thousands on eligible properties
- Regional first home buyer Guarantee for properties in regional areas
- First Home Loan Deposit Scheme for eligible buyers
A gift deposit from family members may also help you reach your deposit goal sooner, though lenders have specific requirements for how this can be used.
Making an Informed Decision
Understanding the fees and costs associated with variable interest rate loans helps you budget accurately and choose the right product for your situation. While fees are important, they shouldn't be your only consideration. The interest rate, loan features, and lender's service quality all play a role in finding the right first home loan for you.
Remember that what works for one first home buyer might not suit another. Your income, savings, employment situation, and long-term plans all influence which home loan application will serve you well.
If you're ready to take the next step in buying your first home, working with an experienced finance broker can help you understand your options and find a loan that fits your circumstances. We specialise in helping Queensland first home buyers navigate the home loan application process and access available grants and schemes.
Call one of our team or book an appointment at a time that works for you. We'll help you understand your borrowing capacity, explore your home loan options, and guide you through each stage of your first home loan application.