Smart Ways to Approach a Variable Rate Home Loan

A variable rate home loan means your repayments can go up or down, and as a first home buyer you should plan for both.

That is the main thing to settle before you apply. A teacher on a steady salary can handle a lot, but only if the budget still works when the rate moves. This article covers how variable loans behave, which features are worth having and how to test your numbers.

What Is a Variable Interest Rate on a Home Loan?

A variable interest rate is a rate your lender can change at any time during the loan. Lenders often change it after the Reserve Bank moves the cash rate, but they are not required to follow it exactly.

When the rate rises, your repayment rises. When it falls, your repayment can fall too. The upside is flexibility. Variable loans usually allow extra repayments, and many come with an offset account or redraw. The downside is uncertainty. You cannot lock in a repayment figure for the life of the loan the way a fixed rate lets you for a set period.

If you want to compare the two approaches in more detail, our team can explain how mortgages for teachers are structured across fixed, variable and split options.

How Much Could Your Repayments Change?

A rate change moves your repayment by a predictable amount, so you can test it before you sign. The numbers below are illustrative only and use an example rate of 6.75% p.a.

Consider a teacher borrowing $600,000 over 30 years on principal and interest. At 6.75% p.a., the monthly repayment is about $3,892. If the rate rose by 1 percentage point to 7.75% p.a., the repayment would be about $4,298. That is roughly $406 more each month.

The outcome of that test is useful. If $4,298 a month would strain your budget, you should borrow less, build a bigger buffer or choose a different structure. A teacher who passes this test before buying is far less likely to be caught short later. You can check your own figures with our borrowing capacity calculator.

The trade-off is that this only shows one scenario. Rates could move by more or less than 1 percentage point, and your lender will also apply its own buffer when assessing what you can borrow.

Offset Account or Redraw: Which Feature Suits a First Home Buyer?

An offset account is a transaction account linked to your loan, and the balance reduces the interest charged on the loan. Redraw lets you withdraw extra repayments you have already made.

For a teacher, an offset can suit a pay cycle well. Your salary lands in the account, sits against the loan during the term and still stays available for bills. A redraw facility does a similar job on interest, since extra repayments reduce the balance, but access rules differ between lenders.

The cost is that loans with an offset often carry a higher rate or an annual package fee, depending on the lender. If your spare cash is small, the fee can outweigh the interest you save. Ask for the fee and rate with and without the offset before you decide.

Can You Get a Variable Loan With a Small Deposit?

Yes, variable loans are available with a small deposit, but a deposit under 20% usually triggers Lenders Mortgage Insurance (LMI) unless a scheme or waiver applies. LMI is a one-off cost added to your loan, and it protects the lender, not you.

The Australian Government 5% Deposit Scheme lets eligible first home buyers purchase with a 5% deposit without paying LMI, because Housing Australia backs the lender for the portion between the deposit and 20% of the property value. There are no income caps, and applications go through a participating lender. Price caps apply by location, and the home must be your own residence. The trade-off is that your loan is larger, so your repayments and your exposure to rate rises are larger too. Loan features such as offset accounts depend on the lender, so confirm what is available with the lender.

Our page on the 5% Deposit Scheme for teachers explains how it works. Some lenders also offer LMI waivers for teachers, which depend on the lender and your circumstances.

Pre-Approval: Test the Loan Before You Make an Offer

Pre-approval is a lender's conditional indication of how much you can borrow, and it helps you set a realistic budget before you inspect homes. It is not a final approval, and the lender can change its position if your circumstances or the property change.

Lenders assess income by employment type, and policies differ between lenders, so tell your broker early whether you are permanent, contract or casual. Getting loan pre-approval lets you bid or sign with a clear ceiling.

The limit is that pre-approval does not lock in a rate. The rate you receive on a variable loan is the one on offer when you settle, so keep a buffer in your budget.

Asking for a Lower Rate on Your Variable Loan

You can ask a lender for a lower rate, and a broker can compare lenders for you. Variable rates differ from lender to lender, and discounts depend on your deposit size, your loan type and the lender.

It is worth checking again after you settle, since variable rates are not fixed in place. If your lender's rate drifts above what new customers receive, you can ask for a review or look at refinancing. Our guide to getting a lower interest rate covers how to approach that conversation. The cost to weigh is that switching lenders can involve fees and paperwork, so compare the saving against those costs first.

Teachers also have options built around their profession, and our home loans for teachers page outlines what lenders look at. A mortgage broker for teachers can compare variable loan structures and check whether schemes such as the 5% Deposit Scheme fit your plans.

Call one of our team or book an appointment at a time that works for you, and we will run your repayment numbers at a rate buffer before you commit.

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