Variable Interest rates

Posted on: 28.08.2016

So you’re looking to refinance, you have been given the choice of 3 different lenders with similar offer’s. It’s your Uprosper broker’s job to recommend a certain product, and loan structure based on your situation but it is also very important for you to understand the differences to be able to make informed decisions.

What is a standard variable interest rate?

This is an interest rate set by the lenders that allows you to pay extra onto your home loan, but also fluctuates with the home loan market. So if interest rates rise your repayments will change, unlike a fixed rate home loan.

So what is so complex about this option? Many lenders offer different types of variable rate options which can make things confusing. I have detailed the main ones below:

• Honeymoon variable rate: This product is similar to the basic variable. Generally limited fees, a low variable rate and no or low ongoing fees. This one differs from the  basic variable because as the name suggests it is usually for the first 2-3 years of your loan then as a general rule the interest rate sky rockets. So whilst this is a good option, you need to make sure you complete a review once the honeymoon period is over.
• A basic variable rate: As the name suggests, this loan option has no frills. No offset account, usually coupled with a low interest rate. Generally has no or low upfront and ongoing fees.
• Professional package variable: This loan product has all the bells and whistles like an offset account, unlimited redraw, fee free credit card and generally a competitive interest rate. This loan also usually includes a discount off the standard variable rate for the life of your loan which can be a great option. This loan option is usually accompanied by an annual free, and no other ongoing fees.

You are presented with 3 options from your mortgage broker, all very similiar but slightly different. Which one should you choose. I have given an example below.

Lender 1:
Interest rate: 3.80%
Product: Honeymoon variable (3 years)

Lender 2:
Interest rate 3.82%
Product: Basic variable

Lender 3:
Interest rate 3.92% (including a 1.40% discount for the life of the loan).
Product: Professional package

Let’s assume for this example that all upfront and ongoing fees are the same.
The obvious answer (one would think) is to choose the option with the cheapest variable interest rate, for some peoples circumstances this may be the right option but in most cases we would recommend the professional package. Aside from the benefits of having an offset account, the reason behind my recommendation is as follows.
The life long discount of 1.40% ensures that whilst rates could increase you will always receive a 1.40% discount for the life of the loan off the lenders Standard variable interest rate. The basic variable option may be the cheapest right now but that doesn’t mean that 6 months after taking out the loan the bank cannot increase that variable option dramatically and because you aren’t guaranteed a discount you don’t know how long this will last.
The honeymoon option is good for now, but a home loan is for longer than 3 years so whilst you can review it in 3 years time we personally would prefer the security of the guaranteed discount.

Everyone’s circumstance is different so whilst the above scenario won’t always suit you , it is so important that you contact Uprosper to talk to an experienced broker that is willing to explain the differences in home loan options. Ensuring you optimize your savings over the life of the loan. Keeping more of your hard earn’t money in YOUR pocket, not the banks.

Best of Luck,

THE UPROSPER TEAM