What is a variable rate home loan?

A variable rate home loan is a home loan with an interest rate that may change over time. If you choose a variable rate home loan, you may be able to take advantage of any interest rate decreases over your loan’s term. If your rate decreases, it means you pay less interest on the home loan balance.

On the other hand, you may also find that your rate increases, which would involve paying a higher interest rate and regular repayment amount than at the start of your loan term.

How is a variable interest rate calculated?

You can calculate your interest in two steps.

First, you multiply the balance on your loan by your interest rate and divide by 365 days in a year. This shows your daily interest charges.

You then add together your daily interest charges for every day in each month, which produces the monthly interest charge shown on your statement.

Finally, you divide this up according to your preferred repayment frequency, whether that’s weekly, fortnightly or monthly. This figure is your repayment amount.

If your loan balance was $500,000 with an interest rate of 4.93% p.a. and monthly repayments, the calculation might look like this:

500,000 x 0.0493 / 365 = $67.53 interest per day

$67.53 x 30 days in September = $2,026 interest for September

What is the difference between fixed and variable interest rates?

Fixed interest rates differ from variable interest rates in that they do not change over the fixed interest rate term of the loan (1-5 years). Fixed rates allow you to lock in some certainty about your rate and how much your repayments will be over the fixed rate term. They also mean you don’t take advantage of any potential decreases in your home loan interest rate, which is one potential benefit of a variable rate loan.

Can I switch from fixed to variable?

In most cases, if you have a fixed rate home loan, you will be able to switch part or all your balance to a new variable rate loan. Note that this may incur break costs if you are making the change before the end of the fixed rate term.

It is also possible to switch all or part of a variable home loan balance to a fixed rate if you want to. Break costs don’t apply when switching from variable to fixed, although you may need to pay other fees.