Variable Rate Loans and Extra Repayments for First Home Buyers

Understanding Variable Rate Loans for First Home Buyers

When you're buying your first home in Evanston Park, choosing the right home loan structure is one of the most important decisions you'll make. Variable interest rate loans offer flexibility that can work in your favour, particularly when it comes to making extra repayments.

A variable interest rate means your rate can move up or down based on changes in the lending market and the Reserve Bank's decisions. Unlike a fixed interest rate that stays the same for a set period, your variable rate will fluctuate. This might sound concerning, but it comes with significant advantages that many first home buyers overlook.

For those working through their first home loan application, understanding these options helps you make informed decisions about your financial future.

The Benefits of Variable Rate Loans

Variable rate loans typically offer more features than fixed interest rate loans. These additional features can make a substantial difference to how quickly you pay off your mortgage.

Key benefits include:

1. Flexibility with repayments - Make extra repayments whenever you have spare funds
2. Access to offset account - Link a transaction account to reduce interest charged
3. Redraw facilities - Access extra repayments you've made if needed
4. No break costs - Refinance or pay off your loan early without penalties
5. Potential rate decreases - Benefit when interest rates drop

These features are particularly valuable for first home buyers who may receive gifts, bonuses, or tax returns that can be directed toward their mortgage.

How Extra Repayments Save You Money

Making extra repayments on your home loan is one of the most effective ways to reduce the total interest you'll pay over the life of your loan. Even small additional amounts can make a significant difference.

For example, if you have a $400,000 home loan with a 30-year term at a variable interest rate of 6%, your monthly repayment would be approximately $2,398. By adding just $200 extra per month, you could:

• Save over $70,000 in interest
• Reduce your loan term by approximately 5 years
• Build equity in your home faster

This is why understanding your first home buyer budget and identifying where you can direct extra funds toward your mortgage is crucial.

Variable Rates vs Fixed Interest Rates

When reviewing your home loan options, you'll need to decide between variable and fixed interest rates, or perhaps a combination of both.

A fixed interest rate provides certainty - your repayments stay the same for the fixed period, typically 1-5 years. This can help with budgeting and protects you from rate increases. However, fixed rate loans usually don't allow extra repayments beyond a certain limit (often $10,000-$30,000 per year), and you can't access redraw or offset account features.

Variable interest rates offer flexibility. While your repayments can increase if rates rise, they'll also decrease when rates fall. Most importantly for wealth building, you can make unlimited extra repayments without penalty.

Many first home buyers choose a split loan - part fixed for security and part variable for flexibility. This approach lets you make extra repayments on the variable portion while enjoying rate certainty on the fixed portion.

Understanding Offset Accounts

An offset account is a transaction account linked to your variable rate home loan. The balance in this account 'offsets' the loan balance when calculating interest.

For instance, if you have a $400,000 loan and $20,000 in your offset account, you'll only pay interest on $380,000. The funds in your offset account remain accessible for everyday expenses, but they work to reduce your interest charges.

This feature is particularly valuable for first home buyers in Evanston Park who want flexibility with their savings while still reducing their mortgage interest. You can use your offset account for:

• Emergency funds that remain accessible
• Saving for renovations or furniture
• Managing irregular income if you're self-employed
• Building savings while minimising mortgage interest

Not all lenders offer offset accounts with the same benefits, so it's worth comparing your home loan options carefully when you apply for a home loan.

Making the Most of Redraw Facilities

A redraw facility allows you to access extra repayments you've made on your variable rate loan. This differs from an offset account because the money is actually paid into your loan, reducing your balance and interest immediately.

When you need those funds, you can 'redraw' them, usually through internet banking or by contacting your lender. Some lenders charge redraw fees, while others offer this feature at no cost.

Redraw facilities work well for first home buyers who want to:

• Make large extra repayments when possible
• Maximise interest savings
• Maintain access to funds for genuine emergencies
• Build a buffer for future needs

However, it's important to maintain discipline. Frequent redraws can undermine your goal of paying off your mortgage faster.

First Home Buyer Assistance Programs

First home buyers in South Australia can access several programs that may influence your loan structure choice:

First Home Owner Grants (FHOG) - Available for new homes, this grant can boost your deposit and potentially help you avoid Lenders Mortgage Insurance (LMI).

First home buyer stamp duty concessions - South Australian first home buyers may receive significant stamp duty discounts or exemptions, freeing up funds for extra repayments.

Home Guarantee Scheme - Including the First Home Loan Deposit Scheme and Regional First Home Buyer Guarantee, these programs allow eligible buyers to purchase with a 5% deposit or 10% deposit without paying LMI.

First Home Super Saver Scheme - This federal program lets you save for your deposit through your superannuation, potentially providing more funds to direct toward extra repayments once you've purchased.

Understanding your first home buyer eligibility for these programs is an essential part of your first home buyer checklist.

Low Deposit Options and Extra Repayments

Many first home buyers worry that entering the market with low deposit options means they'll pay more interest over time. While Lenders Mortgage Insurance (LMI) does add to your initial costs, choosing a variable rate loan with extra repayment features can help you build equity quickly.

If you're using a 5% deposit or 10% deposit to enter the market sooner, your strategy should include:

1. Directing any savings toward extra repayments once you've established an emergency fund
2. Using a gift deposit or windfall to immediately reduce your loan balance
3. Setting up automatic additional repayments, even if they're small
4. Maximising your offset account balance to reduce interest

These approaches help you build equity faster and may allow you to refinance and remove LMI sooner than you think.

Getting Pre-Approval with the Right Loan Features

When you seek pre-approval for your home loan, discuss your plans for making extra repayments with your mortgage broker. Not all variable rate loans offer the same features, and some come with restrictions you should know about.

Questions to ask during your first home loan application process:

• Are there limits on extra repayments?
• Does the loan include an offset account?
• What are the redraw terms and fees?
• Can I split my loan between fixed and variable?
• What interest rate discounts are available?
• Are there ongoing fees that could offset my savings?

At Simple Lending, we help first home buyers in Evanston Park compare these features across multiple lenders to find the right fit for your circumstances and goals.

Creating Your Extra Repayment Strategy

Once you've secured your variable rate home loan, developing a systematic approach to extra repayments helps you stay on track.

Consider these strategies:

Increase your repayment frequency - Switch from monthly to fortnightly repayments. You'll make 26 half-payments per year (equivalent to 13 monthly payments instead of 12).

Round up your repayments - If your monthly repayment is $2,398, consider paying $2,500 or $2,600 instead.

Direct windfalls to your loan - Tax returns, work bonuses, and gifts can all accelerate your progress.

Review your budget regularly - As your income increases or expenses decrease, adjust your repayments accordingly.

Set up automatic transfers - Make extra repayments automatic so you don't have to think about it.

Even if you can only afford an extra $50-100 per month initially, starting the habit early compounds over time. As you progress in your career and your income grows, you can increase these amounts.

When to Consider Refinancing

Your first home loan doesn't have to be your forever loan. As you build equity and your financial situation improves, refinancing might offer better interest rate discounts or features that weren't available when you first bought your home.

Consider reviewing your loan every few years, particularly if:

• Interest rates have decreased significantly
• Your loan-to-value ratio has improved (you've built substantial equity)
• You want access to features your current loan doesn't offer
• You're no longer paying LMI and can access better rates
• You've improved your credit score since your initial application

A mortgage broker for first home buyers in Evanston Park can help you assess whether refinancing makes sense for your situation.

Common Mistakes to Avoid

First home buyers sometimes make decisions that limit their ability to get ahead on their mortgage:

• Choosing a fixed rate loan purely for certainty without considering the lost flexibility
• Failing to establish an emergency fund before making large extra repayments
• Focusing solely on the interest rate while ignoring valuable features
• Not comparing loan options across multiple lenders
• Redrawing extra repayments too frequently for non-essential purchases
• Overlooking the value of professional mortgage advice

Working with an experienced broker helps you avoid these pitfalls and structure your loan in a way that supports your long-term financial goals.

Moving Forward with Confidence

Understanding how variable interest rate loans work with extra repayments gives you powerful tools to build wealth through property ownership. While buying your first home might feel overwhelming, making informed decisions about your loan structure sets you up for long-term success.

The key is finding the right balance between affordable repayments and aggressive debt reduction. Your circumstances will be unique - what works for one first home buyer might not suit another. That's why personalised advice matters.

If you're a first home buyer in Evanston Park exploring your home loan options, we're here to help you understand the choices available and create a strategy that aligns with your goals. Call one of our team or book an appointment at a time that works for you to discuss your first home loan application and how variable rate loans with extra repayments can help you achieve home ownership sooner.