Standard Variable Loan

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Variable Home Loan

When applying for a home loan one of the first decisions most borrowers face is if they should go with a variable rate home loan, a fixed home loan or a combination of the two.

A variable rate home loan is a home loan where the interest rate moves up and down generally in line with changes to the reserve bank changes in the cash rate. It must be noted, however, that while the standard variable rate the banks advertise used to move in-line with changes of the cash rate this is no longer always the case. Many lenders fail to pass on the same size cuts as the reserve bank, and sometimes increase or decrease their interest rate out of step with the reserve bank.

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One of the biggest reasons a borrower will choose a variable rate home loan is due to the flexibility it provides. The standard variable home loan will generally come with an offset account, repayment holidays, fee free bank account, cheque book and redraw and will generally allow you to pay-off as much or as little as you like.

The first question you should be asking your self to help make the decision is “If interest rates rise, how will it affect my ability to maintain my repayments?” You can calculate and try different scenarios using our mortgage calculator. If a small rise in interest rates such as half to one percent would cause you to struggle then you probably really want to consider fixing your loan or at least a large portion of your loan.

If the change would not affect your ability to meet your commitments than you decision is likely to be based around the trade of between the flexibility of a variable rate loan and the certainty a fixed rate provides.

When you would go variable rate loan?

If you have significant surplus cashflow above that of your mortgage payments than going variable may be well worth it. It is a good idea to calculate how much extra you might pay of per year and make sure that if your combining with a fixed rate loan that the variable portion is large enough to handle the surplus income.

Eg. 20,000 surplus per year. Going to fix a portion for 5 years. 5*20,000 = 100,000

You would therefore want to at least have a variable portion of 100,000. I would also probably allow another 20k to 30k to take into account wage increases and reduction in interest cost due to paying down the loan.

When you decide to live in a house of your own you come across certain financial limitations at times. Applying for home loans makes you come across the choice between fixed or variable home loans. The main difference between these two is that the interest rate and repayments of variable home loans are not fixed, i.e. it may change at any time at the lender caution. Interest rates generally rise and an increase in interest rate may result more amount of monthly repayment that will be more than the amount that you can afford.

Variability is also known as floating interest rate/adjustable rate.

Variability is also known as floating interest rate/adjustable rate. Such credit consistently uses base rate or an index to establish the interest rate for each applicable period. For example a five year loan may be valued at interest rate payment at every six-month. The base is agreed between the lender and the borrower.

Usually a variable home loan with floating interest rate is better than the fixed rate loan as it costs less than fixed rate loans depending in part on the yield curve. This low loan rate attracts the borrower to take the risk of interest rate which might increase. When the yield curve is higher in some cases, the cost of interest may get higher. In some cases a maximum change in interest rate is sometimes also allowable.

The total payment of rate floats is adjustable. The loan tenure might be longer than the interest rate period. Like a 25 year mortgage may be priced off in only 6 months. Floating rate loans are most common in banking industries and large corporate customers. Variable Home loan is referred with other names to predominate and publicize it in the countries and also among the customers internationally.

In many countries such as Canada, the providence of floating rate loans is considered as a social norm. The benefit of a variable rate loan is that whether the rate is rising or falling or flat, you are paying the market price for housing debt, in that particular time frame. One reason for this is that people who take a variable rate loan might assume that they can find extra funds if the rate rises.

Consequently, your payments will vary as long as your payments are blended with principal and interest. If interest rates are on the decline, then it would be better to apply for a variable home loan.


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