Understanding Variable Rate Loan Fees and Costs

What Are Variable Rate Loans?

When you're buying your first home, understanding your home loan options is essential. A variable interest rate loan is a type of home loan where the interest rate can change over time, based on market conditions and decisions made by your lender. Unlike a fixed interest rate, which remains constant for a set period, variable rates fluctuate, which means your repayments can increase or decrease throughout the life of your loan.

For first home buyers in Golden Grove, variable rate loans often come with additional features that can help you pay off your mortgage sooner, such as an offset account and redraw facilities. However, these loans also come with various fees and costs that you should understand before submitting your first home loan application.

Understanding the Fees Associated With Variable Rate Loans

When you apply for a home loan, several fees and costs will be involved. Being aware of these upfront can help you create an accurate first home buyer budget and avoid surprises later.

Application Fees

Many lenders charge an application fee (also called an establishment fee) when you apply for a home loan. This fee covers the administrative costs of processing your home loan application. Application fees can range from a few hundred to over a thousand dollars, though some lenders may waive this fee as part of promotional offers or interest rate discounts.

Lenders Mortgage Insurance (LMI)

If you're applying with a low deposit option—such as a 5% deposit or 10% deposit—your lender will likely require you to pay Lenders Mortgage Insurance. LMI protects the lender if you're unable to meet your loan repayments. This cost can be substantial, often running into thousands of dollars, and is typically added to your loan amount rather than paid upfront.

However, first home buyers may be eligible for schemes like the First Home Loan Deposit Scheme or Regional First Home Buyer Guarantee, which can help you avoid LMI even with a smaller deposit.

Valuation Fees

Before approving your loan, most lenders will require a professional valuation of the property you're purchasing. Valuation fees typically range from $200 to $500, depending on the property's location and value. Some lenders include this fee in your loan or waive it entirely, so it's worth checking when comparing home loan options.

Settlement Fees

Settlement fees (or discharge fees) cover the legal and administrative work involved in finalising your home loan. These fees are usually paid to your lender at settlement and can vary significantly between institutions.

Ongoing Costs of Variable Rate Loans

Beyond the initial fees, there are ongoing costs associated with maintaining a variable rate loan that first home buyers need to consider.

Monthly Account Keeping Fees

Some lenders charge a monthly account keeping fee, which can range from $10 to $30 per month. Over the life of your loan, these fees add up, so it's important to factor them into your first home buyer budget. Many modern lenders offer loans without monthly fees, so this is worth investigating.

Annual Package Fees

If your variable rate loan is part of a home loan package that includes features like an offset account, redraw facility, or interest rate discounts, you may be charged an annual package fee. These fees typically range from $200 to $400 per year. While the fee seems like an additional cost, the benefits of these features—such as reducing the interest you pay through an offset account—often outweigh the expense.

Redraw and Offset Account Costs

Many variable rate loans come with a redraw facility, which allows you to access extra repayments you've made on your loan. Some lenders charge a fee each time you make a redraw, typically between $20 and $50 per transaction.

An offset account, on the other hand, is a transaction account linked to your home loan. The balance in this account offsets the interest charged on your mortgage, potentially saving you thousands over the loan term. Most lenders include offset accounts as part of their variable rate loan packages, though some may charge a fee for this feature.

Variable Interest Rate Changes and Your Repayments

One of the defining characteristics of a variable interest rate loan is that your repayments can change when the interest rate moves. When the Reserve Bank of Australia adjusts the cash rate, lenders typically respond by changing their variable interest rates.

While this means your repayments could decrease when rates fall, they can also increase when rates rise. This is different from a fixed interest rate, where your repayments remain the same regardless of market movements. Understanding this variability is crucial when assessing your first home buyer eligibility and ensuring you can comfortably afford repayments even if rates increase.

First Home Buyer Concessions and Grants

As a first home buyer in Golden Grove, you may be eligible for various government assistance programs that can reduce your upfront costs:

• First home owner grants (FHOG): Available for eligible first home buyers purchasing or building a new home
• First home buyer stamp duty concessions: Can significantly reduce or eliminate stamp duty costs
• First Home Super Saver Scheme: Allows you to save for your deposit through your superannuation fund with tax benefits
• First Home Loan Deposit Scheme: Enables eligible first home buyers to purchase a home with as little as a 5% deposit without paying LMI
• Regional First Home Buyer Guarantee: Similar support for those purchasing in regional areas

These programs can make a substantial difference to your first home buyer budget and should be explored as part of your first home buyer checklist.

Additional Costs to Consider

When budgeting for your first home loan, don't forget these additional expenses:

1. Legal and conveyancing fees: Covers the legal work required to transfer property ownership
2. Building and pest inspections: Essential for identifying potential issues with the property
3. Mortgage registration fees: Government charges for registering your mortgage
4. Transfer fees: Government charges for transferring property title
5. Moving and relocation costs: Often overlooked but can be substantial

Getting Pre-Approval for Your First Home Loan

Obtaining pre-approval is a vital step in your home buying journey. Pre-approval gives you a clear understanding of how much you can borrow and demonstrates to sellers that you're a serious buyer. The pre-approval process involves submitting your financial information to a lender, who will assess your borrowing capacity and provide conditional approval for a loan amount.

Getting loan pre-approval typically involves providing documents such as payslips, bank statements, and identification. This process can also help you identify any fees or costs associated with your chosen loan before you commit.

Comparing Variable Rate Loans

When comparing variable rate home loan options, consider:

• The advertised interest rate and any interest rate discounts available
• All associated fees (application, monthly, annual)
• Features included (offset account, redraw, additional repayments)
• The lender's reputation and customer service
• Flexibility to make extra repayments without penalty

For first home buyers in Golden Grove, working with a mortgage broker can help you compare loans from multiple lenders and identify the most suitable option for your circumstances.

Making Extra Repayments

One of the key advantages of variable rate loans is the flexibility to make additional repayments without penalty. By paying more than the minimum required amount, you can reduce the principal faster, save on interest charges, and potentially pay off your loan years earlier.

If you receive a gift deposit from family members or a work bonus, applying this to your loan can make a significant difference over time.

Using a Mortgage Broker

Working with a mortgage broker from Simple Lending can save you time and potentially money when securing your first home loan. Brokers have access to multiple lenders and can help you:

• Understand different home loan options and features
• Compare interest rates and fees across various lenders
• Navigate the first home loan application process
• Identify which first home buyer grants and concessions you're eligible for
• Find low deposit options that suit your financial situation
• Secure competitive interest rate discounts

A broker can provide personalised advice based on your financial circumstances and help you avoid costly mistakes during the application process.

When you're ready to take the next step towards buying your first home, understanding the fees and costs associated with variable rate loans will help you make an informed decision. From application fees and LMI to ongoing account fees and the flexibility to make extra repayments, knowing what to expect ensures you can budget appropriately and choose the right home loan for your needs.

Call one of our team or book an appointment at a time that works for you. Our experienced mortgage brokers at Simple Lending are here to guide you through every step of your first home buying journey in Golden Grove.