The Pros and Cons of Variable Rates and Extra Repayments

A variable rate loan gives you room to pay your home loan off sooner, but your repayments can go up when rates do. If you're a first home buyer in Point Cook, that trade-off is worth understanding before you sign anything.

This article covers how variable loans work, what extra repayments can do for you, and what a rate rise could look like on a real set of numbers.

What Is a Variable Rate Home Loan?

A variable rate home loan has an interest rate your lender can change over time, so your repayments can rise or fall. It's the most common choice among home loan options for first home buyers because it usually allows extra repayments without penalty.

A fixed interest rate stays put for a set period, which gives certainty but often limits how much extra you can pay. A variable interest rate moves, usually after changes in the wider economy and the lender's own decisions. You can read more about the different home loans available and how they compare.

Variable Rate Pros and Cons for a First Home Buyer

The main upside of a variable loan is flexibility, and the main downside is that repayments aren't predictable. Both matter when you're stretching to buy your first home.

On the plus side, variable loans commonly let you pay extra whenever you like, and they often come with an offset account or redraw facility. If rates fall, your repayments can drop too.

On the minus side, a rate rise lifts your repayment with little warning. If your budget is already tight, that can hurt. Before you decide, it helps to know how much you can safely borrow, and our borrowing capacity page is a good place to start.

Redraw vs Offset Account: Where Should Your Extra Repayments Go?

Extra repayments into a redraw facility reduce your loan balance and can usually be withdrawn later, while an offset account is a separate transaction account whose balance is netted against your loan. Both cut the interest charged, but they work differently.

With redraw, the money sits inside the loan. Access rules vary by lender, and some limit how often or how much you can pull out. With an offset account, your savings stay in a separate account you can use day to day. Interest is worked out on the loan balance minus the offset balance.

The trade-off: offset accounts can come with fees or a different interest rate, depending on the lender and the loan. Redraw is often built into the loan at no extra cost, but access can be less flexible. If you plan to keep a cash buffer, an offset account may suit you. If you want to put every spare dollar into the loan, redraw may be enough.

What a Rate Rise Looks Like on a $600,000 Loan

On an illustrative $600,000 loan over 30 years at 6.75% p.a., principal and interest repayments are about $3,892 a month. If the rate rose by one percentage point to 7.75%, they would be about $4,299, which is roughly $407 more each month.

These figures are illustrative only and use the example rate of 6.75% p.a., not a current offer. Now consider a first home buyer who sets up an extra $200 a month from day one. Their repayment is about $4,092 a month. If the rate rises by a point, they would see their payment rise by about $207, but only because they were already paying $200 above the minimum. Stopping the extra $200 would only return them to the old minimum of $3,892, which is below the new required repayment of $4,299, so the new minimum still has to be paid.

In a scenario like this, the extra repayments reduce the balance, and any cushion is simply the cash you were already setting aside. They don't halve the effect of a rate rise. Whether you can redraw extra repayments depends on your lender's terms, so check them with your lender or broker. Use a repayment calculator to test your own numbers.

Using Schemes With a Variable Loan in Point Cook

Government schemes can lower your upfront costs, but they don't change the need to check which loan features you can actually get. Point Cook buyers are in Victoria, so Victorian rules apply to stamp duty.

Under the Victorian first home buyer duty rules, no land transfer duty is payable on a dutiable value up to $600,000. A concession applies above $600,000 up to $750,000, and standard rates apply above that. The buyer must live in the home for at least 12 months, starting within 12 months of settlement.

The Australian Government 5% Deposit Scheme lets eligible first home buyers buy with a 5% deposit without paying LMI, because Housing Australia backs part of the loan. Applications go through a participating lender, and your price cap depends on the suburb and postcode in Housing Australia's postcode search tool. The trade-off is that you're limited to the participating lenders, and Housing Australia's published material doesn't say which loan features, such as offset accounts or fixed and variable options, are available. Ask the lender before you commit.

If you're weighing up a pre-approval, our first home buyers page explains the process. Our Point Cook mortgage broker team can also compare lenders and loan features to see what fits your budget.

Talk to us about your variable rate options and how extra repayments could fit your budget. Call one of our team or book an appointment at a time that works for you.

Frequently Asked Questions