Variable Rate Loans: The Pros and Cons for First Home Buyers

Understanding Variable Interest Rate Home Loans

When you're buying your first home, one of the most important decisions you'll make is choosing between a fixed interest rate and a variable interest rate for your home loan. Variable rate loans are popular among first home buyers because they offer flexibility and the potential to benefit from rate decreases. However, they also come with uncertainties that you should understand before making your first home loan application.

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 that stays the same for a set period, variable rates fluctuate, which means your repayments can go up or down throughout the life of your loan.

The Advantages of Variable Rate Home Loans

Flexibility and Features

Variable rate home loans typically come with more features than fixed rate alternatives. Most variable rate products include:

• Offset account: Link a transaction account to your home loan, and the balance in your offset account reduces the amount of interest you pay
• Redraw facility: Make extra repayments and access them later if needed
• Unlimited additional repayments without penalties
• The ability to make lump sum payments to reduce your loan faster

These features can help you pay off your first home loan more quickly and save thousands in interest over the loan term.

Potential for Interest Rate Decreases

When the Reserve Bank of Australia lowers the official cash rate, lenders often pass on these reductions to customers with variable rate loans. This means your repayments could decrease, giving you more money in your first home buyer budget for other expenses or to make extra repayments.

No Break Costs

Unlike fixed rate loans, if you decide to refinance your home loan or pay it off early, you won't face expensive break costs. This flexibility is particularly valuable if your circumstances change or you find a more suitable loan product.

The Disadvantages of Variable Rate Home Loans

Payment Uncertainty

The main drawback of variable interest rate home loans is unpredictability. Your repayments can increase when the interest rate rises, which can put pressure on your household budget. For first home buyers who are already stretching to afford their first home loan, unexpected payment increases can create financial stress.

Budgeting Challenges

Without knowing exactly what your repayments will be in six months or a year, planning your finances can be more difficult. This uncertainty makes it harder to commit to other financial goals or large purchases.

Potentially Higher Starting Rates

While variable rates can decrease, they're sometimes higher than introductory fixed rates being offered by lenders. It's important to compare all your home loan options carefully.

What Features Should First Home Buyers Look For?

When comparing variable rate home loan options, consider these important features:

1. Offset Account Access: An offset account can significantly reduce the interest you pay over time. Even keeping your salary in an offset account for a few weeks between pay periods makes a difference.

2. Redraw Facilities: This allows you to access extra repayments you've made, providing a financial safety net for unexpected expenses.

3. Interest Rate Discounts: Many lenders offer interest rate discounts for various reasons, including:

   • Low deposit options like the First Home Loan Deposit Scheme
   • Professional packages
   • Bundle discounts when you have multiple products with the lender

4. Repayment Flexibility: The ability to make extra repayments without penalty helps you pay off your loan faster when you have additional funds available.

5. Split Loan Options: Some lenders allow you to split your loan between variable and fixed portions, giving you both stability and flexibility.

How Variable Rates Interact with First Home Buyer Schemes

Victorian first home buyers can access several government initiatives that work well with variable rate loans:

First Home Loan Deposit Scheme

The First Home Loan Deposit Scheme allows eligible first home buyers to purchase a property with just a 5% deposit, with the government guaranteeing up to 15% of the property value. This scheme is available with both variable and fixed rate loans.

Low Deposit Options

Many lenders offer low deposit options for first home buyers, allowing you to purchase with a 5% deposit or 10% deposit. While you'll typically need to pay Lenders Mortgage Insurance (LMI) when borrowing more than 80% of the property value, some lenders offer LMI waivers for certain professions.

First Home Owner Grants (FHOG) and Stamp Duty Concessions

Victorian first home buyers may be eligible for first home buyer grants and first home buyer stamp duty concessions when purchasing a new or established home. These benefits apply regardless of whether you choose a variable or fixed interest rate.

Regional First Home Buyer Guarantee

If you're considering buying in regional Victoria, such as Officer or Pakenham, the Regional First Home Buyer Guarantee may help you enter the property market sooner with a smaller deposit.

Understanding Your First Home Buyer Eligibility

Before applying for a home loan, you'll need to meet certain first home buyer eligibility criteria:

• You must be an Australian citizen or permanent resident
• You haven't previously owned property in Australia
• You meet the lender's lending criteria, including income and credit history requirements
• The property value falls within scheme limits (if accessing government schemes)
• You intend to live in the property as your primary residence

Making Extra Repayments with Variable Rates

One of the biggest advantages of variable rate loans is the ability to make unlimited extra repayments. Even small additional amounts can make a significant difference:

• An extra $100 per fortnight on a $500,000 loan could save you over $50,000 in interest and reduce your loan term by several years
• Using an offset account effectively is like making extra repayments without losing access to your money
• A redraw facility means extra repayments are still accessible if you need them for emergencies

How to Apply for a Home Loan with Simple Lending

When you're ready to apply for a home loan, having the right support makes the process much smoother. Here's what you'll need:

First Home Buyer Checklist

• Recent payslips (usually last two months)
• Tax returns if you're self-employed
• Bank statements showing your savings history
• Identification documents
• Details about your employment and income
• Information about any debts or financial commitments
• Gift deposit documentation if receiving family assistance

Getting Pre-Approval

Obtaining pre-approval before you start house hunting gives you confidence about your borrowing capacity and shows sellers you're a serious buyer. Pre-approval is particularly valuable in competitive property markets where you need to act quickly.

First Home Loan Application Process

Your first home loan application involves several steps:

1. Initial consultation to understand your circumstances and goals
2. Assessment of your borrowing capacity
3. Comparison of suitable home loan options from multiple lenders
4. Lodgement of your application
5. Liaising with the lender throughout the assessment process
6. Settlement and accessing your funds

Variable Rates vs Fixed Rates: Making the Right Choice

There's no universally right answer when choosing between variable and fixed interest rates. The decision depends on your individual circumstances:

Consider a variable rate if you:

• Want flexibility to make extra repayments
• Value features like offset accounts and redraw facilities
• Are comfortable with payment fluctuations
• Believe interest rates may decrease
• Don't want to pay break costs if circumstances change

Consider a fixed rate if you:

• Prefer certainty in your repayments
• Are budgeting carefully and need predictable expenses
• Believe interest rates will increase
• Want protection from rate rises during the fixed period

Many Victorian first home buyers choose a combination approach, splitting their loan between fixed and variable portions to enjoy benefits of both.

Additional Support for First Home Buyers

First Home Super Saver Scheme

The first home super saver scheme allows you to save money for your deposit inside your superannuation fund, where it benefits from concessional tax treatment. You can contribute up to $50,000 and then withdraw it (along with associated earnings) for your first home deposit.

Understanding Lenders Mortgage Insurance (LMI)

When you borrow more than 80% of a property's value, you'll typically need to pay Lenders Mortgage Insurance (LMI). This protects the lender if you default on your loan. While LMI adds to your upfront costs, it allows you to purchase a home sooner with a smaller deposit rather than waiting years to save 20%.

Some options to reduce or avoid LMI include:

• Using the First Home Loan Deposit Scheme
• Accessing lender-specific LMI waivers for certain professions
• Having a family member act as a guarantor

Why Choose Simple Lending?

As a finance and mortgage broking business serving Victorian first home buyers, Simple Lending provides expert guidance throughout your home buying journey. We compare home loan options from multiple lenders to find products that match your needs and circumstances.

Our service includes:

• Personalised assessment of your situation
• Explanation of all available first home buyer schemes and concessions
• Assistance with your first home buyer checklist and documentation
• Support throughout the application and settlement process
• Ongoing advice as your circumstances change

Whether you're considering properties in established Melbourne suburbs, growing regional areas, or anywhere across Victoria, we're here to help you understand your options and make informed decisions about your first home loan.

Variable rate home loans offer flexibility and features that can benefit first home buyers, but they require careful consideration of your financial situation and risk tolerance. Understanding both the advantages and disadvantages helps you make the right choice for your circumstances.

Call one of our team or book an appointment at a time that works for you. We're ready to help you take the next step towards buying your first home.