Standard variable rates
Explore the advantages and disadvantages, so you can make an informed decision.
The advantages and disadvantages, and its functions
What is a standard variable-rate home loan?
A standard variable-rate means the interest rate on your mortgage can change over time in response to market conditions and your lender’s pricing decisions. Unlike a fixed rate, which stays the same for a set period, a variable interest rate moves up or down, impacting your repayments.
Variable interest rates are influenced by:
- The Reserve Bank of Australia’s (RBA) cash rate.
- Lender policies and market competition.
- Economic factors such as inflation and funding costs.
How does a standard variable-rate work?
When the variable interest rate decreases, your repayments reduce, saving you money. Conversely, if rates rise, your repayments increase. Most variable rate loans offer flexibility, including:
- Extra repayments without penalty.
- Redraw facility to access surplus funds.
- Offset account to reduce interest payable.
Pros of a variable-rate
Standard variable rates
1. Potential cost savings
If interest rates fall, your repayments may decrease, potentially saving you thousands of dollars over the life of the loan.
2. Flexibility
Make unlimited extra repayments.
Access to redraw facilities.
Pair with an offset account to reduce interest.
3. No break costs
Unlike fixed-rate loans, you can refinance or pay off your loan early without hefty penalties.
4. Access to competitive deals
Lenders often offer discounts or package deals on variable rate loans.
Potential cons of a standard variable-rate
The uncertainty of variable-rate
1. Repayment uncertainty
Your repayments can increase if interest rates rise, making budgeting harder.
2. Market dependency
Rate changes are influenced by economic conditions, which are unpredictable.
3. Higher rates during inflation
In times of economic tightening, variable rates can climb significantly.
4. Less stability
If you prefer predictable repayments, a variable rate may not suit your financial planning.
5. Borrower takes on all the risk
With a variable-rate loan, borrowers are exposed to interest-rate fluctuations. While lenders often adjust rates following changes to the RBA cash rate, they may also change rates independently due to funding costs, market conditions, or business decisions.
Is a standard variable-rate the right option for you?
A standard variable-rate is ideal if you value flexibility and can manage potential rate fluctuations. It’s less suitable for borrowers who need certainty in their monthly repayments.
Need expert guidance?
Choosing between fixed and variable interest rates isn’t easy, it’s like trying to read the tea leaves. At Vanquish Finance Group, we compare options across 60+ lenders to find the right solution for your goals.
Contact us today to discuss your options and find a home loan that best suits your needs.
