Variable Interest Rate Loans

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Standard variable loans

Standard variable loans are the most popular home loan type in Australia. The interest rate on this loan moves up and down due to a number of factors, including official interest rate fluctuations and the cost of funding. This means the interest rate may go up or down during the loan term. Different lenders offer different features and rates on their standard variable loan products, generally according to the amount you are borrowing.

What is the current standard variable interest rate?

Standard variable interest rates are actually not standard and different lenders have different ’standard’ rates. The one most commonly referred to in the press however is the standard variable rate of the major lenders. While the RBA may cut or raise the official cash rate, this does not neccessarily translate into the same movement on your standard variable loans. The degree to which rate cuts or rises are passed on varies among the different lenders. For individual lender comparison rates on current standard variable loan products, you will need to talk to a mortgage broker.

Pros	Cons
If interest rates drop, repayments might drop. Generally, additional or extra payments reducing the principle can be made without penalty, allowing the home loan to be paid off faster. Additional repayments can usually be taken back by you. This product is flexible and often has more features.	If interest rates rise, repayments might rise along with the amount of interest paid. The borrower is then required to make larger repayments. Generally attract a higher interest rate than basic home loans.

Basic variable loans

Basic variable loans are loans with lower interest rates, but with fewer features than a standard variable loan. The interest rate can rise or fall over the term of the loan, just as it does with a standard variable rate loan. These loans are typically “no frills” products, although there are more features being added by some lenders as the market becomes more competitive.

Pros	Cons
Lower interest rate than the standard variable loans (usually around 0.5-1.00% less). Repayments are lower than standard variable loans. If interest rates drop, repayments also drop.	Usually not as flexible as standard variable loans. Offer less features. If interest rates rise, repayments also rise. The borrower is then required to make larger repayments.

How do variable rates move up and down

Variable rates are driven by Reserve Bank policy and the cost of funding, while fixed rates are driven by the views of those that put their money out to the fixed rate wholesale market. The Reserve Bank’s policy is based on a range of economic indicators and they use interest rates to manage people’s expenditure and thereby the economy.