There are an ever greater variety of loans available today to Australians financing their homes. Variable Rate Loans – also known as Adjustable Rate Loans – are one of the major alternatives when being locked into a traditional, fixed rate one seems too restrictive. The core idea of these is that the rate at which interest accrues varies over time, typically as the Reserve Bank adjusts the national cash rate.
A historically good deal for home buyers
Variable Rate Loans are often mistrusted because they introduce a level of financial risk for the borrower. But these loans also have the potential to reduce payments, and with sound financial advice, many home buyers are able to negotiate one in their favour. Furthermore, the Australian cash rate has been on a historic downward trend over the last 25 years, and is at an all-time low.
Make sure you’re looking at the right details
If you are considering taking out a Variable Rate Loan yourself, you should start by looking for a few key figures:
- Adjustment Period: The core of any variable loan is how often the interest rate will be recalculated. This reflects the riskiness of the loan, with shorter adjustment periods harder to plan for.
- Initial Rate: The starting point for interest from which future repayments will vary. Depending on the adjustment period, you could be paying interest at this rate for quite a while.
- Initial Discount: Many lenders will take advantage of the loan’s flexible terms to sweeten the deal with a period of discounted repayments. Prospective savings can be alluring, but should be considered against the full life of the loan.
How to get the odds on your side
It can really pay to get advice on what extra options you might be able to include to help make your loan more favourable in the long run. You might negotiate with your lender to put a cap on some of the loan’s variable elements, limiting the potential risk. The fixed adjustment period functions as a cap, but caps can also cover incremental rate adjustments or overall growth of interest.
Another possibility when negotiating a Variable Rate Loan is to include the option to transition it to a fixed rate loan, usually after some number of years have passed. Since the risks of the variable rate are easier to account for in the short term, this can remove a lot of the uncertainty for the borrower.
As these risky elements are accounted for, you can see how more Australians could stand to take advantage of Variable Rate Loans for themselves. Why not check them out?