Smart Ways to Approach a Variable Rate as a First Home Buyer

A variable rate loan suits a first home buyer who wants room to change course as life changes. Your rate can move up or down, but you also get features that help when your roster, income or family shifts.

Detectives work odd hours, get called out at short notice and often see income move with overtime and allowances. A loan that bends with that is worth a close look. This article walks through how a variable rate behaves at three stages: buying, settling in, and growing.

What Is a Variable Interest Rate Loan?

A variable interest rate loan has a rate your lender can change over time, so your repayments can rise or fall. It usually comes with extras such as an offset account and redraw, which fixed loans often limit.

The trade-off is certainty. If rates rise, your repayment rises too, so you need a buffer in your budget. Lenders also assess whether you could afford repayments at a higher rate than the one you are offered. You can check how much a lender may let you borrow on our borrowing capacity page.

How Does a Variable Rate Work at the Buying Stage?

At the buying stage, a variable rate loan can sit alongside a smaller deposit, but the deposit you need is set by the lender's lending policy and any scheme you use, not by the rate type. It also leaves room to add extra repayments without penalty in most cases.

Deposits under 20% usually attract Lenders Mortgage Insurance (LMI) unless a scheme applies. The Australian Government 5% Deposit Scheme can remove LMI for eligible first home buyers. Housing Australia backs the lender for the part of the loan between your deposit and 20% of the property value. Applications go through a participating lender, and price caps apply by location. The scheme's published materials do not say which loan features come with it, so ask your broker whether a variable loan with an offset is on offer. Our 5% Deposit Scheme page for police officers covers the detail, and our low deposit loans for police officers page explains the other routes.

The main cost of a small deposit is a bigger loan, which means higher repayments and more interest over time.

Using an Offset Account on a Variable Loan

An offset account is a transaction account linked to your loan, where the balance reduces the amount you pay interest on. A variable loan often comes with one, though some lenders charge a fee or a higher rate for the feature.

Consider a detective who buys a first home with a $500,000 loan at the illustrative rate of 6.75% p.a. over 30 years. The repayment is about $3,243 a month. Say overtime and a pay-out lands in the account, and $30,000 sits in offset instead of being spent. Interest is then charged on $470,000 rather than $500,000. At 6.75%, that is roughly $169 less interest each month, while the repayment stays the same. The money is still there if a car dies or the roster changes. The catch is discipline. Cash in offset only helps while it stays there, and the loan may carry a higher fee than a basic one.

This example uses an illustrative rate only. Your own rate depends on your deposit and lender.

Can You Lock In Savings With Interest Rate Discounts?

Yes, many lenders offer interest rate discounts on variable loans, and the size can depend on your deposit and your loan size. Ask your lender or broker whether any profession-based discounts or policies are available.

A discount applies to the lender's standard variable rate, which the lender can still change. It is worth asking for a review every year or so. Our getting a lower interest rate page explains how that conversation can go. Compare the full cost, including annual fees, not only the headline rate.

How Does a Variable Rate Suit Mid-Life Changes?

A variable rate suits mid-life changes because you can usually make extra repayments, use redraw and refinance without the break costs that can apply to fixed loans.

Redraw lets you pull back extra repayments you have made. Offset keeps your cash separate from the loan. Both help when parental leave, a move into a specialist unit or shift work changes your cash flow.

Consider a detective couple with a young child. One partner drops to part-time for a year. Because their loan is variable with redraw, they had been paying a little extra each month. They draw on that buffer during the leave and return to normal repayments afterwards. The outcome is that their repayments never fall behind. The trade-off is that redraw is only there if you built it up, and some lenders can limit access. Ask your lender about redraw rules before you sign.

When Should You Think About Fixing Part of Your Loan?

You can fix part of your loan if you want certainty on some repayments while keeping flexibility on the rest. This is called a split loan.

The fixed portion usually limits extra repayments and can carry break costs if you exit early. When a fixed term ends, you move to a variable rate unless you choose a new one, so our fixed rate expiry page is worth a read. A broker can compare options for you.

Getting Ready to Apply for a Home Loan

Pre-approval shows you roughly how much a lender may let you borrow before you start looking. It is not a final approval, and the lender will still check the property and your details.

If you plan to use the 5% Deposit Scheme, applications go through a participating lender, so tell your broker early. Read about getting loan pre-approval to see what to expect. If you are a detective, see our home loans for detectives page. We can also look at other support such as the First Home Super Saver scheme, which is run by the ATO, and state grants. Seek advice from your accountant on any tax outcome.

Call one of our team or book an appointment at a time that works for you. We work around your roster, so tell us when suits and we will fit in.

Frequently Asked Questions