The Variable Rate Home Loan
When choosing a home loan, one of the most important decisions is whether to opt for a standard variable rate loan or a basic variable rate loan. These are the most popular loan types in Australia, each offering distinct advantages and potential drawbacks.
What is a Standard Variable Loan?
A standard variable home loan has an interest rate that fluctuates over time based on economic factors such as the official cash rate set by the Reserve Bank of Australia (RBA) and lender funding costs. This means your repayments may rise or fall over the life of the loan..
Your monthly repayments include both interest and a portion of the principal, helping you gradually reduce your loan balance.
What is a Basic Variable Loan?
A basic variable loan is a simplified version of the standard variable loan. It generally comes with a lower interest rate but fewer features, such as limited redraw facilities and reduced repayment flexibility.
The Impact of Interest Rates
The Fixed, Variable, and Split options are often determined by the current cash rate (translating to the retail interest rates made available via lenders). The graph below shows recent trends. Our FAQ module provides more detailed information on Interest Rates and Inflation.
The current cash rate is 4.10.
When choosing a home loan, one of the most important decisions is whether to opt for a standard variable rate loan or a basic variable rate loan. These are the most popular loan types in Australia, each offering distinct advantages and potential drawbacks.
What is a Standard Variable Loan?
A standard variable home loan has an interest rate that fluctuates over time based on economic factors such as the official cash rate set by the Reserve Bank of Australia (RBA) and lender funding costs. This means your repayments may rise or fall over the life of the loan..
Your monthly repayments include both interest and a portion of the principal, helping you gradually reduce your loan balance.
What is a Basic Variable Loan?
A basic variable loan is a simplified version of the standard variable loan. It generally comes with a lower interest rate but fewer features, such as limited redraw facilities and reduced repayment flexibility.
Pros of the Standard Variable Home Loan
Lower repayments when interest rates fall
- If the RBA lowers the cash rate, lenders may pass on savings, reducing your mortgage repayments.
- For example, if your loan repayment was originally $2,500 per month and rates dropped, you might see it decrease to $2,400—putting more money in your pocket.
Flexibility to make extra repayments
- You can make additional payments to reduce your loan principal faster.
- Even a small extra repayment—such as an additional $50 per fortnight—could save thousands in interest over the loan term.
Access to a redraw facility
- Many standard variable loans allow you to withdraw extra repayments if you need cash unexpectedly.
- For example, if you’ve paid an extra $10,000 into your mortgage, you may be able to access that money for an emergency expense, renovations, or investment opportunities.
Potential for offset accounts
- Some standard variable loans come with an offset account, allowing you to reduce interest by linking your home loan to a transaction account.
- For example, if you have a $500,000 mortgage and $20,000 in an offset account, you’ll only be charged interest on $480,000, saving you money over time.
Cons of the Standard Variable Home Loan
Risk of rising interest rates
- If rates increase, so do your repayments.
- A 1% interest rate hike on a loan makes a seriously significant impact on repayments.
Temptation to access redraw funds
- If you frequently dip into your redraw facility, you may struggle to pay off your loan early.
- Discipline is key—consider locking extra savings in an offset account instead.
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Pros of the Basic Variable Home Loan
Potentially lower rates
- Lenders typically offer a discounted rate, meaning you pay less in interest compared to standard variable loans.
- This makes it a great option for budget-conscious borrowers who don’t need advanced features.
Fewer features = fewer temptations
- Many basic variable loans do not have a redraw facility, reducing the temptation to access money already paid into your loan.
Cons of the Basic Variable Home Loan
Limited repayment flexibility
- Many lenders cap additional repayments or charge fees for paying off your loan early.
- If you receive a bonus or inheritance, you may not be able to pay down your mortgage as quickly as you’d like.
No access to extra repayments
- Unlike standard variable loans, most basic variable loans do not allow you to redraw extra payments.
- If you’ve overpaid your loan but suddenly need funds for an emergency, you won’t (necessarily) be able to access that money.
We’ll walk you though the process and ensure you are structured for maximum wealth creation and lowest repayments, but you should think in advance about what redraw and extra repayment flexibility you might require.
