Understanding Variable Rate Home Loans
When you're buying your first home in Hobart, one of the most important decisions you'll make is choosing between a variable interest rate and a fixed interest rate for your home loan. A variable interest rate means your loan repayments can change over time as the lender adjusts their rates in response to market conditions and Reserve Bank decisions.
For many first home buyers, variable rate loans offer flexibility and features that can help you pay off your mortgage faster. Understanding how these loans work will help you make an informed decision when completing your first home loan application.
How Variable Interest Rates Work
Unlike a fixed interest rate that stays the same for a set period, a variable rate can move up or down throughout the life of your loan. When interest rates decrease, your repayments will be lower, potentially saving you thousands of dollars over the life of your loan. Conversely, when rates increase, your repayments will go up.
Lenders typically review their variable rates regularly, and changes can happen at any time. This means your monthly repayments aren't locked in, which requires you to factor some flexibility into your first home buyer budget. However, the potential for interest rate discounts and the ability to make extra repayments without penalty often makes variable rates attractive to first home buyers.
Benefits of Variable Rate Loans for First Home Buyers
Variable rate home loans come with several advantages that can benefit first home buyers:
- Offset account access: Many variable rate loans include an offset account, which is a transaction account linked to your home loan. The balance in this account offsets your loan balance, reducing the interest you pay
- Redraw facilities: Most variable loans allow you to make extra repayments and withdraw them later if needed through a redraw facility
- No break fees: Unlike fixed rate loans, you won't face penalties if you want to refinance or pay off your loan early
- Potential rate decreases: When interest rates fall, your repayments automatically decrease without needing to refinance
- Flexibility for extra repayments: You can usually make unlimited additional repayments to pay off your loan faster
First Home Buyer Eligibility and Variable Rates
To qualify for a variable rate home loan, you'll need to meet certain first home buyer eligibility criteria. Lenders will assess your income, employment history, existing debts, and credit score when processing your home loan application.
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Many first home buyers in Hobart can access low deposit options including 5% deposit and 10% deposit schemes through the First Home Loan Deposit Scheme (now called the Home Guarantee Scheme). These schemes can help you avoid Lenders Mortgage Insurance (LMI) even with a smaller deposit, making variable rate loans more accessible.
You may also be eligible for first home owner grants (FHOG) and first home buyer stamp duty concessions, which can significantly reduce your upfront costs. The Regional first home buyer Guarantee may also apply to properties in certain areas around Hobart.
Combining Variable Rates with Government Schemes
The First Home Loan Deposit Scheme has helped thousands of first home buyers enter the property market with deposits as low as 5%. When combined with a variable rate loan, this can provide both affordability and flexibility.
You can also explore the first home super saver scheme, which allows you to save money inside your superannuation fund for your first home deposit. This can help you build your deposit faster while benefiting from the tax advantages of superannuation.
Variable Rates vs Fixed Rates: Making Your Choice
When deciding between variable and fixed interest rates, consider your financial situation and risk tolerance. If you prefer certainty in your repayments and want protection against rate increases, a fixed rate might suit you. However, if you value flexibility and want to take advantage of features like offset accounts and extra repayments, variable rates are worth considering.
Some first home buyers choose a split loan, where part of the loan is fixed and part is variable, providing a balance of certainty and flexibility.
Deposit Options and Gift Deposits
When applying for a home loan with a variable rate, you'll typically need a deposit of at least 5% to 10% of the property value. If you're able to save a 10% deposit, you'll have access to more home loan options and potentially better interest rates.
Many lenders also accept gift deposits from family members, which can help you reach your deposit goal faster. This money must be genuinely gifted rather than a loan you need to repay, and you'll need to provide documentation to prove this during your first home loan application.
The Home Loan Application Process
When you're ready to apply for a home loan with a variable rate, you'll need to gather several documents including:
- Proof of identity (driver's licence, passport)
- Proof of income (payslips, tax returns for self-employed)
- Bank statements showing your savings and spending habits
- Details of any existing debts or financial commitments
- Information about the property you're purchasing
Getting pre-approval before you start house hunting can give you confidence about your budget and make you a more attractive buyer to vendors. Pre-approval is particularly valuable in Hobart's property market, where you want to act quickly when you find the right home.
Understanding Offset Accounts and Redraw Facilities
Two of the most valuable features of variable rate loans are offset accounts and redraw facilities. An offset account works like a regular transaction account but reduces the interest charged on your home loan. For example, if you have a $400,000 home loan and $20,000 in your offset account, you'll only pay interest on $380,000.
A redraw facility allows you to access extra repayments you've made on your loan. This provides financial flexibility if you have unexpected expenses while still benefiting from reduced interest when the money sits in your loan account.
First Home Buyer Checklist for Variable Rate Loans
Before committing to a variable rate home loan, work through this first home buyer checklist:
- Research current interest rates from multiple lenders
- Calculate your borrowing capacity and realistic budget
- Save your deposit and budget for additional costs like stamp duty and legal fees
- Check your eligibility for first home buyer grants and concessions
- Compare loan features like offset accounts and redraw facilities
- Understand the ongoing fees and charges
- Consider getting professional advice from a mortgage broker
- Obtain pre-approval to strengthen your position as a buyer
Working with Simple Lending in Hobart
At Simple Lending, we specialise in helping first home buyers throughout the home loan application process. We understand the Hobart property market and can help you find a variable rate loan that suits your circumstances.
Our team can assist you with understanding your home loan options, maximising your borrowing capacity, and accessing government schemes like the Home Guarantee Scheme. We work with multiple lenders to find competitive variable interest rates and beneficial loan features.
Making Extra Repayments on Variable Rate Loans
One of the biggest advantages of variable rate loans is the ability to make extra repayments without penalty. Even small additional payments can significantly reduce the interest you pay over the life of your loan and help you become mortgage-free sooner.
For example, if you receive a tax refund, work bonus, or inheritance, you can put this money straight into your variable rate home loan. Combined with an offset account, this flexibility helps you manage your finances effectively throughout your homeownership journey.
Taking Your Next Steps
Buying your first home is a significant milestone, and choosing the right loan structure is crucial to your long-term financial wellbeing. Variable rate loans offer flexibility and features that can help you pay off your home loan faster while adapting to your changing financial circumstances.
Understanding the difference between variable and fixed interest rates, knowing your first home buyer eligibility, and accessing available grants and concessions will position you for success in the Hobart property market.
Call one of our team or book an appointment at a time that works for you. We're here to help you understand your home loan options and guide you through the process of buying your first home.
