What is a Variable Rate Home Loan?
When you're building a property portfolio, understanding your home loan options is crucial to your investment strategy. A variable interest rate home loan is one where the interest rate can move up or down throughout the life of your loan. Unlike a fixed interest rate home loan where your rate stays the same for a set period, variable home loan rates fluctuate based on market conditions and lender decisions.
For property investors, variable rate loans offer a level of flexibility that can align well with your investment goals. Let's explore what makes these loan products tick and whether they suit your investment approach.
Key Features of Variable Rate Loans
Variable rate home loans come packed with features that can benefit property investors:
- Offset account: A linked offset account lets you park your savings against your loan amount, reducing the interest you pay
- Additional repayments: Make extra payments whenever you have spare cash to build equity faster
- Redraw facility: Access those extra repayments if you need them for your next investment or unexpected expenses
- Portable loan: Move your loan to a different property without reapplying
- Split loan: Combine variable and fixed rate portions in one home loan package
These home loan features give you control over how you manage your debt and grow your portfolio.
How Variable Interest Rates Work
Your variable interest rate is influenced by several factors. The Reserve Bank of Australia's cash rate plays a significant role, but lenders also consider their own funding costs and business strategies. When rates drop, your repayments decrease. When they rise, you'll pay more.
For investment loans, lenders typically charge slightly higher rates compared to owner occupied home loan products. This reflects the perceived higher risk of lending for investment purposes. However, the flexibility often makes up for this difference.
Benefits for Property Investors
Variable rate loans offer several advantages when you're working to achieve home ownership goals and invest in property:
- Flexibility to pay off faster: Without penalty, you can make additional repayments when rental income is strong or when you receive other income
- Access to features: The mortgage offset account alone can save thousands in interest over the loan term
- Rate discount opportunities: Many lenders offer interest rate discounts for investors with multiple properties or larger loan amounts
- Improve borrowing capacity: By reducing your loan balance faster, you can position yourself for your next purchase
- Adapt to market changes: If rates fall, you benefit immediately without needing to refinance
Understanding Interest Only vs Principal and Interest
As an investor, you'll need to decide between interest only and principal and interest repayments. Interest only loans keep your repayments lower, which can improve your cash flow and help you need lower repayments in the short term. This approach is popular among investors who want to maximise their tax deductions and free up capital for additional investments.
Principal and interest repayments mean you're building equity from day one. While your repayments are higher, you're working towards owning the property outright and creating long-term financial stability.
Comparing Variable Rate Options
When you compare rates across different lenders, you'll notice significant variations. Some lenders advertise lowest rates to attract borrowers, but these often come with fewer features or higher fees. Others offer comprehensive home loan packages with more flexibility but slightly higher rates.
At Mortgage Path, we access home loan options from banks and lenders across Australia. This means we can help you compare rates and features to find products that match your investment strategy, not just the advertised rate.
The Loan Application Process
When you apply for a home loan with a variable rate, lenders assess several factors:
- Your income and employment stability
- Existing debts and expenses
- The property's value and your loan to value ratio (LVR)
- Your credit history
- Rental income from investment properties
If your LVR exceeds 80%, you'll typically need to pay Lenders Mortgage Insurance (LMI), which protects the lender if you can't meet your repayments. For first home buyers entering the investment market, understanding these costs is vital for calculating home loan repayments accurately.
Home Loan Pre-approval
Before you start property hunting, consider getting home loan pre-approval. This tells you exactly how much you can borrow and shows sellers you're a serious buyer. Pre-approval is especially valuable in competitive property markets where you need to move quickly.
The pre-approval process involves a thorough assessment of your financial position. Lenders will verify your income, review your expenses, and determine your borrowing capacity. This gives you confidence when making offers and negotiating prices.
Managing Your Variable Rate Loan
Once you've secured your variable rate loan, active management can save you thousands. Here's how:
- Use your offset account: Keep as much money as possible in your linked offset to reduce interest charges
- Review your current home loan rates: Markets change, and so do lender offerings. Regular reviews ensure you're still getting value
- Make extra repayments: Even small additional amounts can significantly reduce your loan term
- Monitor rate movements: Stay informed about rate changes and how they affect your repayments
- Consider a split loan: As your portfolio grows, splitting between fixed and variable can provide stability while maintaining flexibility
A loan health check periodically can identify opportunities to optimise your position.
Variable vs Fixed: Making the Choice
Many investors ask whether they should choose variable or fixed interest rate products. The answer depends on your circumstances and market conditions. A fixed interest rate home loan provides certainty, which can help with budgeting and cash flow planning. However, you'll miss out if rates fall, and you'll face restrictions on extra repayments.
Variable rate loans suit investors who value flexibility and want to take advantage of features like offset accounts. They're particularly appropriate if you expect to receive irregular income or plan to make substantial additional repayments.
Some investors choose a split rate approach, which combines both loan types. This gives you the security of fixed repayments on a portion of your loan while maintaining flexibility on the rest.
Building Your Investment Strategy
Your choice of home loan products should align with your broader investment goals. Are you focused on building equity quickly, maximising cash flow, or expanding your portfolio? Different loan structures support different strategies.
Variable rate loans work particularly well if you're planning to build equity through additional repayments or if you want the flexibility to access funds for your next investment. The home loan benefits extend beyond just the interest rate - they're about having options as your circumstances change.
For property investors serious about securing their financial future through real estate, understanding loan structures is as important as choosing the right property. The home loan features available with variable products can accelerate your wealth creation when used strategically.
Getting Professional Help
With hundreds of home loan options available across Australian lenders, finding the right fit takes time and expertise. As mortgage brokers, we work with multiple lenders to find loan products that match your investment strategy and financial situation.
We can help you understand rate discounts available, calculate different scenarios for calculating home loan repayments, and structure your loans to support your long-term goals. Whether you're purchasing your first home loan for investment or adding to an existing portfolio, professional guidance can make a substantial difference to your outcomes.
Ready to explore variable rate options for your investment property? Call one of our team or book an appointment at a time that works for you. Let's discuss how the right home loan structure can support your property investment journey and help you secure your financial future.
