What is a Variable Interest Rate?
When you're buying your first home, one of the biggest decisions you'll face is choosing between a fixed interest rate and a variable interest rate. A variable rate loan means your 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.
For first home buyers in QLD, understanding how variable rates work is crucial to managing your first home buyer budget and making informed choices about your home loan options.
How Variable Rates Affect Your Repayments
Unlike fixed interest rates that stay the same for a set period, variable interest rates can change at any time. This means your monthly repayments might increase or decrease depending on market conditions.
Here's what this means for you:
- When rates drop, you'll pay less interest and could reduce your loan faster
- When rates rise, your repayments will increase
- You need to factor potential rate changes into your first home buyer budget
- Having a financial buffer can help you manage rate fluctuations
Many first home buyers choose variable rates because they typically offer more flexibility than fixed rate loans, which we'll explore shortly.
The Flexibility Benefits of Variable Rate Loans
Variable rate home loans come with features that can help you pay off your mortgage sooner and save on interest. These features are often restricted or unavailable with fixed interest rate loans.
Offset Account
An offset account is a transaction account linked to your home loan. The balance in this account offsets the amount you owe on your mortgage, reducing the interest you pay. 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 extra repayments you've made on your loan. This can be helpful if you need funds for renovations or unexpected expenses. It's worth checking the terms though, as some lenders charge fees for redraw or limit how often you can access these funds.
Making Extra Repayments
With most variable rate loans, you can make additional repayments without penalty. This means if you receive a work bonus or tax return, you can put it straight onto your loan and reduce your interest costs over time.
Understanding Interest Rate Discounts
When you apply for a home loan, lenders often advertise interest rate discounts off their standard variable rate. These discounts can depend on several factors:
- The size of your deposit
- Your employment situation
- Whether you bundle other products (like insurance) with your loan
- Your borrowing amount
- If you're a professional in certain occupations
As a first home buyer, you might qualify for specific first home buyer eligibility criteria that could help you secure better interest rate discounts. It's worth exploring your options thoroughly during your first home loan application.
Variable Rates and Low Deposit Options
If you're entering the property market with a smaller deposit, variable rate loans can work well with various low deposit options available to first home buyers.
5% Deposit Options
The Regional First Home Buyer Guarantee allows eligible first home buyers to purchase a home with just a 5% deposit without paying Lenders Mortgage Insurance (LMI). This government scheme can be combined with variable rate loans, giving you both flexibility and affordability.
10% Deposit Loans
With a 10% deposit, you'll have access to a wider range of lenders and potentially more competitive variable interest rates. You may still need to pay LMI, but there are ways to reduce or avoid this cost.
Gift Deposits
Many lenders accept genuine savings combined with a gift deposit from family members. This can help you reach the required deposit threshold faster and access variable rate loans with your chosen lender.
Combining Variable Rates with First Home Buyer Grants
Queensland first home buyers can access various first home owner grants (FHOG) and concessions, including first home buyer stamp duty concessions. These benefits work regardless of whether you choose a variable or fixed interest rate, but understanding your loan structure helps you maximise these opportunities.
When combined with the First Home Super Saver Scheme, you can build your deposit while enjoying tax benefits, then apply these savings to a variable rate loan that offers ongoing flexibility.
Getting Pre-Approval for a Variable Rate Loan
Before you start house hunting, it's wise to get pre-approval for your home loan. This process involves:
- Completing a first home loan application
- Providing documentation about your income and expenses
- Having the lender assess your borrowing capacity
- Receiving conditional approval for a loan amount
Pre-approval gives you confidence when making offers and helps you understand what you can afford. While interest rates quoted at pre-approval might change by settlement, it gives you a solid indication of your position.
Creating Your First Home Buyer Checklist
Before you apply for a home loan with a variable interest rate, make sure you've ticked off these items:
- Reviewed your budget and calculated what you can afford in repayments
- Saved your deposit and costs for settlement
- Checked your eligibility for first home buyer grants and concessions
- Compared features like offset account and redraw facilities
- Understood how rate changes could affect your repayments
- Gathered your documentation (payslips, tax returns, bank statements)
- Considered whether you want to split your loan between fixed and variable
Making the Right Choice for Your Situation
Variable rate loans suit first home buyers who:
- Want flexibility to make extra repayments
- Can manage potential increases in repayments
- Value features like offset accounts
- Believe rates might decrease in the future
- Plan to pay off their loan faster
There's no one-size-fits-all solution when it comes to home loan options. Your personal circumstances, financial goals, and risk tolerance all play a role in determining whether a variable interest rate is right for you.
Working with experienced finance brokers who understand the Queensland property market and first home buyer programs can help you find a loan structure that matches your needs. We can help you compare different lenders, understand the fine print, and identify opportunities to save money on your first home loan.
Call one of our team or book an appointment at a time that works for you. We're here to help you understand your home loan options and support you through every step of your first home buying journey.