Understanding Variable Rate Loans for First Home Buyers

What Is a Variable Rate Loan?

When you're buying your first home, understanding your home loan options is crucial to making an informed decision. A variable interest rate loan is a type of mortgage where the interest rate can change over the life of your loan. Unlike a fixed interest rate, which remains constant for a set period, a variable rate moves up or down based on market conditions and decisions made by lenders.

For first home buyers in Officer, VIC, variable rate loans represent a popular choice due to their flexibility and potential for savings when interest rates decrease. The variable interest rate typically follows the Reserve Bank of Australia's cash rate movements, though lenders aren't obligated to pass on the full amount of any rate changes.

Key Features of Variable Rate Loans

Variable rate home loans come with several features that can benefit first home buyers:

1. Offset Account - Many variable rate loans include an offset account, which is a transaction account linked to your home loan. The balance in this account offsets the amount of interest you pay on your mortgage, potentially saving you thousands over the loan term.

2. Redraw Facility - This feature allows you to access any additional repayments you've made above your required minimum. It provides flexibility if you need funds for unexpected expenses or home improvements.

3. Extra Repayments - Unlike some fixed interest rate loans, variable rate loans typically allow unlimited additional repayments without penalties, helping you pay off your first home loan faster.

4. Interest Rate Discounts - Many lenders offer interest rate discounts on variable rate loans, particularly for first home buyers who meet certain criteria or package their home loan with other products.

Benefits for First Home Buyers

When applying for a home loan as a first home buyer, variable rate loans offer several advantages worth considering:

Flexibility - Variable rate loans provide greater flexibility compared to fixed options. You can make extra repayments, access redraw facilities, and potentially switch loan features as your circumstances change.

Potential Savings - If the market interest rate decreases, your repayments will reduce accordingly without any action required on your part. This can significantly impact your first home buyer budget over time.

No Break Costs - Should you decide to refinance, sell your property, or pay off your loan early, variable rate loans typically don't incur the substantial break costs associated with exiting a fixed interest rate loan.

Access to Features - Variable rate loans often come with more features and flexibility options, including offset accounts and redraw facilities that can help you manage your finances more effectively.

How Variable Rates Affect Your First Home Loan Application

When you apply for a home loan, lenders assess your ability to service the loan using what's called a "buffer rate." This means they test whether you could still afford repayments if interest rates increased. For a first home loan application, understanding this assessment is important.

Lenders typically add a buffer of around 3% to the current interest rate when assessing your borrowing capacity. This protects both you and the lender by ensuring you can manage higher repayments if rates rise. It's part of the comprehensive first home buyer checklist that lenders work through during your home loan application.

Variable Rate Loans and First Home Buyer Schemes

Many government initiatives designed to help first home buyers work well with variable rate loans:

First Home Loan Deposit Scheme - This scheme allows eligible first home buyers to purchase a property with just a 5% deposit without paying Lenders Mortgage Insurance (LMI). You can combine this with a variable rate loan to access flexible repayment features.

Regional First Home Buyer Guarantee - For those purchasing in regional areas, this guarantee enables home ownership with low deposit options while still accessing the benefits of variable rate products.

First Home Super Saver Scheme - You can use savings from this scheme as part of your deposit, whether you choose a variable or fixed interest rate loan.

Understanding LMI and Deposit Requirements

Lenders Mortgage Insurance (LMI) is typically required when you have less than a 20% deposit. As a first home buyer, you might consider:

• 5% Deposit Options - Through government schemes or certain lender programs
• 10% Deposit Loans - Often available with LMI
• Gift Deposit - Some lenders accept genuine gifts from family members as part of your deposit

Variable rate loans are available across all these deposit scenarios, giving you flexibility in how you structure your first home loan.

Comparing Variable and Fixed Interest Rates

When reviewing your home loan options, you'll need to weigh the benefits of variable versus fixed rate loans:

Variable Rate Advantages:

• Rate decreases benefit you immediately
• Greater flexibility with repayments
• Access to offset accounts and redraw facilities
• No break costs if circumstances change

Variable Rate Considerations:

• Repayments can increase if rates rise
• Harder to budget with changing repayments
• No protection from rate increases

First Home Buyer Eligibility and Concessions

Understanding first home buyer eligibility criteria is essential when choosing your loan type. In Victoria, first home buyers can access:

• First Home Buyer Stamp Duty Concessions - Significant savings on stamp duty for eligible properties
• First Home Owner Grants (FHOG) - Financial assistance for purchasing or building your first home
• Various Government Schemes - Including the Home Guarantee Scheme

These benefits apply regardless of whether you choose a variable interest rate or fixed interest rate loan, allowing you to select the loan type that suits your financial situation.

Getting Pre-Approval

Obtaining pre-approval for your first home loan is a crucial step in the buying process. With a variable rate loan, pre-approval:

• Shows sellers you're a serious buyer
• Helps you understand your borrowing capacity
• Locks in documentation requirements
• Provides clarity on your first home buyer budget

Pre-approval typically lasts 90 days, giving you time to find the right property while knowing your financial position.

Making the Right Choice for Officer Residents

Officer, located in Melbourne's south-east growth corridor, offers affordable housing options for first home buyers. When considering a variable rate loan for property in this area, think about:

• Your employment stability and income prospects
• Your ability to handle potential rate increases
• How long you plan to keep the property
• Your comfort level with changing repayments
• Whether you want the flexibility to make extra repayments

Working with a mortgage broker who understands the Officer property market and your personal circumstances can help you make an informed decision about variable rate loans versus other home loan options.

Taking the Next Step

Choosing between a variable interest rate and other home loan options depends on your individual circumstances, financial goals, and risk tolerance. At Simple Lending, we specialise in helping first home buyers understand their options and find the right loan structure for their needs.

Our team can help you:

• Navigate first home buyer grants and concessions
• Understand low deposit options including 5% and 10% deposits
• Access the First Home Loan Deposit Scheme
• Compare variable and fixed rate features
• Complete your first home loan application with confidence

Call one of our team or book an appointment at a time that works for you. We're here to support Officer residents through every step of buying your first home.