Variable interest rate home loan is a very popular product among home buyers. But, before choosing the loan package, you must understand its features, advantages and disadvantages. It will enable you to choose a loan that is perfect for your situation.
What is a Variable Interest Rate Home Loan?
A variable interest rate home loan (sometimes also referred to as a “floating” or “adjustable” rate home loan) is a very popular product in the lending market and a very competitive product offered by most of the lenders/credit providers.
Who is Suited to a Variable Interest Rate Home Loan?
This type of home loan is a perfect fit for:
>> First-time home buyers who just want a home loan product that is simple and not confusing to manage
>> People who just want to stay settled and are not willing to move whether in their work, home, personal life or they are not willing to move to another lender
What Should I Consider When Choosing the Loan?
When choosing it, you should always research and consider the following terms & conditions, being offered by the many lenders/credit providers:
>> Treat any “honeymoon” interest rate offers with caution, and remember to always check whether the discount rate applied to the variable rate is a set amount below whatever the standard variable is
>> Remember that low rate home loans are not always the best choice
>> Try to pick a loan term that suits your finance
>> Decide on what matters most to you (e.g. does it meet your financial goals?)
What are the Features of a Variable Interest Rate Home Loan?
You must know all the below mentioned features of the loan package so you can maximise the benefits:
>> Take advantage of falling “interest rates” when the Reserve bank decides to drop their official rates
>> Make unlimited “extra repayments” each month so you can pay off your home loan faster
>> Take advantage of “redraw facilities” so you can withdraw any extra payments you have made on top of your normal repayment amounts if you need the cash
>> Take advantage of a 100% offset account
What are the Advantages and Disadvantages?
There are many advantages of choosing the loan package such as:
>> Flexibility: It has some flexible features like having options of making additional payments, low introductory interest rates or redrawing facility.
>> Lower repayment option: As the interest rate varies with that of the market index, if the rate falls, the amount of repayment also becomes lower.
>> Ability to pay off the loan faster: This loan type also has the option of enabling you to pay an extra repayment as advance towards the loan. Thus, every month, if you pay an extra amount in addition to your minimum payment amount, you can repay the loan faster.
>> Helps in Budgeting: As this loan gives you the option of weekly, fortnightly or monthly repayment, you can maintain your budget accordingly.
>> Redraw Facility option: This loan type gives you the option of redrawing the additional amount you have made towards the repayment, in addition to the minimum repayment amount.
While the loan has a lot of upsides, it does have some disadvantages, such as:
>> Variable rate is subject to fluctuations: The interest rate is subject to fluctuations and can either rise or fall at any time during the period of the loan. Changes in the interest rate are at the discretion of a lender and they are meant to be broadly in line with market conditions
>> Repayment may become more: So if the interest rate rises, the amount of monthly repayment also becomes more and it may become more than the amount you can afford.
>> Redraw facilities can be subject to limitations, including minimum withdrawal amounts allowable and may also include redraw fees
>> You cannot arrange a rate lock
>> You cannot pay Interest in Advance in some circumstances
>> This loan type offers fewer features than the general loans
What are the Benefits in Making Extra Repayments?
The benefits available to you in making the extra repayments towards your variable interest rate home loan are best illustrated in the following example. The example assumes that you are willing to contribute an additional amount of $200 towards your weekly repayments:
Loan Amount: $530,000
Normal Loan Term: 30 years
Interest Rate: 5.00%
Repayment Frequency: weekly Normal
Weekly Repayment: $656
Extra Weekly Repayment: $200
Interest saved by making extra repayments: $217,815
Time in years saved, by making the extra repayments: 11 years 10 months
Now that you have thorough information of the variable interest rate home loan, you can discuss about it without your finance broker and find the perfect home mortgage loan.
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