Variable rate loan news - January 2025
Peter Drennan, Money.com.au's Research & Data Expert
"Rates on new variable home loans fell from 6.25% p.a. to 6.24% p.a. last month. This trend typically signals that lenders anticipate a rate drop is becoming more likely. The lowest variable rates remain for owner-occupied loans under $600,000, averaging 6.18% p.a., but there are cheaper variable rates out there."
Peter Drennan, Money.com.au's Research & Data Expert
What is a variable rate home loan?
A variable home loan has an interest rate that can go up or down over the loan term — normally in line with changes to Australia’s official cash rate.
This means your mortgage repayments will be lower when interest rates drop but higher when interest rates go up. It’s different to a fixed rate home loan where the rate (and therefore your repayments) remain the same for a set period.
Most variable rate home loans allow you to make extra repayments on your mortgage to pay it off faster, and many come with extra features such as offset and redraw facilities.
According to the Reserve Bank of Australia (RBA), the majority of new owner-occupier loans in Australia (98.0%) are variable. Variable rates are available on owner-occupier and investment home loans.
The RBA Board meets eight times a year to review the cash rate. The cash rate is the interest banks and lenders pay on the money they borrow from other banks. It influences the interest rates paid by consumers, including on home loans and savings accounts.
Will variable home loan interest rates go down in 2025?
Experts predict interest rates will come down in the first half 2025. Two of the big four banks (ANZ and CBA) have revised their forecasts, predicting the first rate cut in February 2025, while NAB and Westpac are sticking to their May 2025 timeline. Opinions also vary on how many cuts we might see this year, with estimates ranging from two to four. Only time will tell how many we’ll actually see.
Mansour Soltani , Money.com.au's home loans expert
“Make extra repayments on your variable rate home loan when interest rates are low. When interest rates are lower, the principal component of your repayments is bigger, helping you smash down your loan faster. When interest rates are higher, it’s inverted, and the interest component of your repayments is bigger so your cents and dollars don’t stretch as far. However, we always recommend consistency as you never know which way interest rates will go.”
Mansour Soltani , Money.com.au's home loans expert
What are the current variable mortgage rates?
- The lowest variable home loan rate on Money’s database is: 5.69% (comparison rate 6.06%). *Based on an owner-occupier loan (with P&I repayments) and a maximum 80% LVR.
- Based on the RBA’s Housing Lending Rates, the average variable home loan rate is: 6.24% p.a. for new loans.
The best variable rates will vary depending on the type of home loan you need (owner-occupier or investor) and your loan-to-value ratio (LVR). Lenders see LVRs lower than 80% as less risky because you’re borrowing less compared to the property's value. Lower LVRs typically mean lower rates, and higher LVRs mean higher rates.
That’s why it’s important to compare loans based on your situation, as the headline rates lenders advertise may not be what you actually qualify for based on your borrowing position.
Types of variable home loans explained
Basic variable home loan
This is a no-frills variable home loan with limited features but a lower interest rate. For example, a basic home loan may have a discount of 0.10% p.a., compared to a lender’s other products with no offset account or redraw.
Introductory discount home loan
This type of home loan comes with a discounted ‘honeymoon’ interest rate for a period of time (usually 1-3 years), and then reverts to a higher variable rate. It’s worth noting that the initial savings may be offset by the higher rate once the introductory period ends.
Standard variable home loan
This is the typical type of variable home loan lenders offer. It comes with all the standard features you’d expect (e.g. offset, redraw) at a standard variable rate. A lender’s standard variable rate is often used as the default interest rate once a borrower’s fixed-rate term expires.
Package home loan
This combines your variable rate home loan with a transaction account and other financial products, like credit cards, in exchange for a discounted interest rate or reduced fees on each product.
When should you choose a variable interest rate on your home loan?
Here are three scenarios where choosing a variable rate home loan could be suitable.
1
Rates are expected to drop in the near future
Opting for a variable rate home loan when there are predictions or indications that interest rates may decrease means you could benefit from lower repayments sooner, compared to if you were locked into a fixed-rate mortgage with hefty break costs to pay. Keep in mind that rate changes can be difficult to predict, and getting help from a mortgage broker is a good idea.
2
You want access to home loan features to pay your mortgage off faster
Variable rate home loans generally offer additional features such as an offset account and the ability to make extra repayments without penalty. These features can help you pay off your mortgage faster and reduce your interest payable over the life of the loan.
3
You want the option to refinance without incurring fees
Variable rate home loans typically offer more flexibility when it comes to refinancing. If you anticipate changes in your financial situation or want to take advantage of better loan terms in the future, having the option to refinance without incurring break fees can be attractive. This flexibility also allows you to take advantage of lower interest rates or better loan features if you spot a better deal elsewhere.
Are variable rates cheaper than fixed rates?
Based on Money’s analysis of Australia’s home loan market, the lowest rates available right now are generally fixed. This may be due to lenders pricing their fixed-rate in anticipation of rate drops in 2025. But if the major bank economists are to be believed, variable rates could drop soon and if you lock into a fixed rate, it may not remain the cheaper option over time.
Mansour Soltani , Money.com.au's home loans expert
“One thing you can bet on is that the banks have already priced in which way they think the market is headed to their rates. They’re hoping borrowers will fix their rate purely based on wanting peace of mind. The best time to fix is when the market is not so volatile, and banks offer a great rate close to the variable. When the gap between fixed and variable rates is too large like it’s been in the past few years, I would choose a variable rate."
Mansour Soltani , Money.com.au's home loans expert
How a rate change can impact your variable rate home loan repayments
Interest rate | Loan amount |
|---|---|
6.00% | $600,000 |
6.25% | $600,000 |
Interest rate | Loan term |
6.00% | 25 years |
6.25% | 25 years |
Interest rate | Monthly repayments |
6.00% | $3,865 |
6.25% | $3,958 |
Interest rate | Interest paid over the life of the loan (if you remain on the same rate) |
6.00% | $559,743 |
6.25% | $587,405 |
| Interest rate | 6.00% | 6.25% |
|---|---|---|
Loan amount | $600,000 | $600,000 |
Loan term | 25 years | 25 years |
Monthly repayments | $3,865 | $3,958 |
Interest paid over the life of the loan (if you remain on the same rate) | $559,743 | $587,405 |
Even a small difference in your rate can have a big impact on your home loan repayments and overall interest payable. The table above shows the monthly repayments and total interest paid over a 25-year loan term for a $600,000 loan with a variable interest rate of 6.00% versus 6.25%. In this example, a 0.25% (25 basis points) rate change could result in a $93 difference in your monthly repayments, or $1,116 less per year. Over the life of the loan, this could also mean $27,620 less in total interest paid.
Variable rate home loan features
Offset account
An offset account is a transaction account linked to your home loan that offsets your home loan balance. You can have a 100% offset where every dollar in that account offsets what you owe on your mortgage and your interest. So, if you have a $600,000 mortgage and $20,000 in your offset account, you'll only be charged interest on $580,000. Alternatively, you can have a partial offset where only a percentage of your account balance offsets your loan balance.
Additional repayments
Most variable rate home loans allow you to make additional repayments without penalty fees. This flexibility helps you pay down your loan faster, saving you interest in the long term. The more you pay off early, the less interest you’ll pay over the life of the loan, which could lead to significant savings.
Redraw facility
Allows you to withdraw any additional repayments you've made on your home loan. It frees up cash and provides flexibility in managing finances. You can withdraw additional repayments for any reason, like medical emergencies, home renovations, paying for a holiday, or paying off other debts.
Flexible repayments
You have the flexibility to choose your preferred repayment frequency for your home loan, whether that’s weekly, fortnightly, or monthly, depending on what suits your budget and cash flow. You may also have the option to opt for interest-only repayments for a specified period. This can be useful if you're looking to lower your repayments in the short term, as you would only pay the interest component on the loan, not the principal.
Split loan
You can split your home loan into fixed and variable portions, balancing stability and flexibility. With this arrangement, a portion of your loan is locked in at a fixed interest rate, providing predictable repayments and protection against rate rises. The remaining portion is at a variable rate, giving you the potential to benefit from any future rate cuts and allowing more flexibility in making extra repayments.
Variable rate home loan pros & cons
Pros
- Your repayments decrease with rate cuts
- Freedom to make additional repayments and redraw
- Easier to refinance with no break fees
Cons
- Your repayments may increase if rates go up
- The unpredictability of variable rates can make it hard to budget or manage repayments
- There are no guarantees that lenders will pass on rate cuts to variable rate customers right away, or at all in extreme cases, meaning your repayments might not reduce as you might expect
How to compare variable home loans
Compare the advertised rate
The advertised rate is the lowest interest rate lenders offer and promote on particular products. It’s a good starting point when assessing variable rate loans, but your actual rate may be different depending on your LVR and loan amount. A lower interest rate means lower repayments and less interest paid in total. Even a 0.10% difference in your rate could save you thousands of dollars on your home loan. Look for the best variable rates among as many lenders as possible, not just the big four banks.
Check the comparison rate too
The advertised interest rate doesn’t give you the full picture of your borrowing costs. Lenders must also show a comparison rate. This estimates the annual cost of a home loan — including fees and interest. It’s designed to offer a more accurate comparison across different lenders and products. However, the comparison rate is always calculated by lenders based on a $150,000 loan amount and a 25-year term which won’t be realistic for all borrower scenarios.
Consider home loan fees
Home loan fees can be the equivalent of up to 1% of your loan amount, so it’s important to consider how they will impact your bottom line. Most lenders charge standard fees to open and maintain your home loan account and additional fees like redraw fees, late payment fees, early termination fees, etc. You can often negotiate with your lender to waive some of these, or your mortgage broker can assist with this.
Choose the right home loan features for your needs
Choose a variable loan with features that will help you save interest on your home loan and pay it off faster. Look for a home loan with offset account, additional repayments option, and redraw facility to start with. These are the most commonly-used features, according to Mansour. Remember, some home loan features come with fees. Make sure to weigh up fees against the benefits the feature provides.
