Each lender sets a standard variable rate and adjusts it when market conditions change. The Reserve Bank of Australia (RBA) sets the cash rate at its monthly board meetings, and most lenders follow its movements - though not always by the same amount or at the same time.
Your repayment amount recalculates when your rate changes. If rates rise, you pay more each month. If they fall, you pay less. The loan term stays the same unless you make changes, but a rate reduction means more of each repayment reduces the principal rather than covering interest.
Variable rates are priced by each lender individually. Two lenders can have very different standard variable rates even when the cash rate is identical. This is why comparing lenders - not just the RBA - matters.
The main advantages of a variable rate home loan are flexibility and features. Most variable loans allow unlimited extra repayments without penalty. You can put a lump sum - a tax refund, an inheritance, a bonus - directly onto the loan and reduce your interest immediately.
Variable loans generally come with offset accounts, which let you reduce the interest calculated on your loan balance by keeping money in a linked transaction account. A $600,000 loan with $80,000 in an offset account charges interest on $520,000 only.
Redraw is also typically available on variable loans, letting you access extra repayments you have made if you need funds later. And unlike fixed loans, you can refinance a variable rate loan at any time without paying a break cost.
The key risk is uncertainty. If rates rise, your repayments rise with them. During periods of rapid rate increases - like 2022 and 2023 in Australia - variable rate borrowers saw repayments increase significantly in a short time. Budgeting becomes harder when your largest expense can change at short notice.
Variable rates are also often higher than introductory fixed rates when the rate environment is stable. Lenders build in a margin to cover the risk of rate movements.
The decision depends on your financial position, your risk tolerance, and the current rate environment. A variable loan suits borrowers who want flexibility, have savings to deploy in an offset account, or want to make significant extra repayments. It also suits those who may want to refinance or sell within a few years.
A fixed loan suits borrowers who need repayment certainty - particularly owner-occupiers on tight budgets who would struggle if rates rose. A split loan - part fixed, part variable - gives some certainty while preserving offset and redraw access on the variable portion.
A broker can model the numbers for your situation. The best choice is not always obvious from the headline rate alone.
Jason and Steve are Adelaide mortgage brokers who give honest advice at no cost to you. No obligation.
The information on this page is general in nature and does not constitute financial advice. Given Finance Pty Ltd (t/a Lendology) ACN 624 144 501 is authorised under LMG Broker Services Pty Ltd ACL 517192.