A variable rate loan can suit a first home buyer who wants room to move as life changes. The rate can go up as well as down, so it helps to know how that would feel in your budget before you sign.
If you are buying your first home in Tanunda or the wider Barossa, this article walks through how these loans work, which features matter, and what to ask a broker.
What Is a Variable Interest Rate Home Loan?
A variable interest rate home loan is a loan where your lender can change the rate over time, so your repayments can rise or fall. Lenders often move their rates after changes in the market, but each lender makes its own decision about when and by how much.
The trade-off is certainty. With a fixed interest rate, your repayment stays the same for a set period. With a variable rate, you gain flexibility but accept that the repayment may change. Many variable loans also let you make extra repayments, which fixed loans often limit.
Which Variable Rate Features Help a First Home Buyer?
The two features most worth asking about are an offset account and redraw. An offset account is a transaction account linked to your loan, and the balance in it reduces the amount you pay interest on. Redraw lets you pull back extra repayments you have already made.
They work differently. Savings in an offset stay in your own account and you can use them like cash. Redraw money has gone into the loan, and some lenders limit or charge for access. The trade-off is cost, because loans with an offset account can carry a higher rate or an annual package fee, depending on the lender. It pays to compare the full cost, not just the headline rate.
What Happens to Repayments When the Rate Moves?
A one percentage point rise on a $500,000 loan adds about $340 a month to the repayment, and an offset account can soften the blow. The figures below use an illustrative rate of 6.75% a year over 30 years, principal and interest.
Consider a first home buyer in Tanunda who borrows $500,000 and keeps $20,000 of savings as a buffer. At 6.75%, the repayment is about $3,243 a month. The buyer chooses a variable loan with an offset account and leaves the $20,000 sitting in it. Interest is then charged on $480,000 instead of $500,000, which cuts about $1,350 in interest in the first year at that rate.
Now say the rate rises to 7.75%. The repayment becomes about $3,582, or roughly $340 more each month. The buyer can see this coming because they tested it before applying, and the offset balance keeps reducing the interest charged. The cost is that the $20,000 has to stay in the account to keep working, so it is not money to spend freely. You can run your own numbers with the mortgage repayment calculator.
How Much Can You Borrow Before Choosing a Loan?
Your borrowing capacity depends on your income, expenses, debts and the lender's assessment, and it decides which loans are open to you. Lenders also test your ability to repay at a higher rate than the one you are offered, so the amount you can borrow is usually lower than what looks affordable today.
Start with the borrowing capacity calculator to get a rough range. Then ask about pre-approval, which is a lender's conditional indication of how much it may lend you. It is not a final approval, and it can change if your finances or the lender's policy change. It does let you shop for a home in the Barossa with a clear budget in mind.
Should You Split Your Loan Between Variable and Fixed?
A split loan divides your borrowing into a variable portion and a fixed portion, so part of your repayment is steady and part stays flexible. It suits buyers who want some certainty but still want an offset account or extra repayments on the rest.
There are costs to weigh. If you pay off or refinance a fixed portion early, the lender may charge break costs. When the fixed term ends, the loan usually moves to a variable rate unless you choose a new fixed term, so it is worth reading about fixed rate expiry before you commit.
Where Do First Home Buyer Schemes Fit In?
Government schemes can change which loans you can use, so check the rules before you choose a loan. Each scheme has its own eligibility rules, price caps and lender requirements, and these are updated from time to time. Some schemes come with their own conditions on loan features, so do not assume an offset account or fixed rate is available with every scheme.
A broker can check the current rules with you and match them to lenders on our panel. Our first home buyers page explains how we work through this with local buyers.
Why Talk to a Local Broker in Tanunda?
A local broker can compare variable loan options from many lenders and explain the cost of each feature in plain language. We know the Barossa and we know the people who live and work here, so we take the time to understand your situation before we suggest anything.
If you are ready to talk, visit our Tanunda mortgage broker page. Call one of our team or book an appointment at a time that works for you. We will go through your budget, your savings and the loan features that suit your plans.
Frequently Asked Questions
What is a variable rate home loan?
It is a loan where the lender can change the interest rate over time, so your repayments can go up or down. It offers flexibility but less certainty than a fixed rate.
Is an offset account worth it for a first home buyer?
It can reduce the interest you pay because your savings balance lowers the amount interest is charged on. Loans with an offset account may have a higher rate or an annual fee, so compare the full cost.
How much more would I repay if the rate rose by 1%?
On an illustrative $500,000 loan over 30 years, moving from 6.75% to 7.75% adds about $340 a month. Your own figure will depend on your loan size and term.
Can I split my loan between fixed and variable?
Yes, many lenders offer split loans. The fixed part gives steady repayments, but break costs may apply if you pay it off early.
