Variable Interest Rate Home Loans
Variable interest rate home loans are the most common of all mortgages. The interest rate is loosely based on the RBA cash rate plus a margin of around 3 percent, however most lenders then offer discounts which will bring this margin back to between 2 and 2.50 percent. The RBA have a monthly meeting to decide on movements to the cash rate and generally these movements are passed on, to some extent by all lenders. Although it is wise to beware of any lender who advertised an interest rate well below the rest of the market as they may simply be deliberately slow passing on a rate increase and so appear for a short period to be very competitive.
Don’t get carried away with lenders discount claims eg: 0.70 percent discount sounds great however that depends on what their standard variable rate is. Unlike a few years when most lenders had very similar standard variable rates, today this can vary by 0.50 percent and so you have to compare based on the actual ‘bottom line’ interest rate being offered.
Another important point to consider is that many lenders tie their interest rate discounts to home loan packages which offer platinum credit cards and other enticements. These are often call “professional packages” and can be very good value for borrowers with a property portfolio, however they usually represent poor value for a borrower with one property. For example on a $250,000 mortgage a $395 annual package fee adds 0.15 percent to the effective interest rate, this would mean the 0.70 percent interest rate discount is really only 0.55 percent. Some banking staff refer to these as ‘Ego-Packs’.