Buying a home is a major financial investment so it makes sense that home buyers would want to save as much money as possible on their loan. In Australia, buyers are saving money with variable rate loans, which makes their loan payments smaller.
What is a variable interest rate?
A variable interest rate, also known as a floating or adjustable rate, is an interest rate that changes based on a prime interest rate that fluctuates with the market. When the prime interest rate drops, the buyer’s interest rate drops. However, when the prime interest rate rises, the buyer’s interest rate also rises.
What are the benefits of a variable rate loan?
On a basic level, a variable rate loan is exactly what it sounds like – a fluctuating interest rate. With a variable interest rate, a borrower’s payments vary based on the current prime interest rate, which is based on the current market. However, most adjustable mortgage loans begin with a low fixed interest rate for a set period of time like three, four, five, or seven years. This low fixed interest rate is attractive to home buyers who want to save as much money as possible.
On the flip side, adjustable rate mortgages benefit the lender when interest rates go up.
Although adjustable rates usually rise at some point, fixed interest rates are generally higher. Adjustable rates are great for people who don’t mind unpredictability and can plan financially for potential rises. However, people who need long-term certainty and stability around interest rates should probably consider a fixed-rate loan instead.
Fixed rates are going up in Australia
Another reason Australian home buyers are choosing variable rate loans is because fixed rates are going up. Westpac and its subsidiaries, including Commonwealth Bank and Bankwest, raised their fixed rates for four and five-year loans. Twenty-four additional lenders raised at least one of their four-year fixed rate loans between February and April 2021. Westpac used to offer a 1.89% four-year fixed rate, but that rate is now unsustainable.
As of April 2021, NAB is offering a four-year fixed rate below 2% along with just 6 other lenders. The lowest rate for a four-year fixed mortgage is 1.95%, offered by BankVic.
The COVID-19 pandemic has lowered interest rates
Another reason many Australian home buyers have chosen variable interest rates is to take advantage of the low interest rates that have been set to help people cope with the pandemic. However, low interest rates aren’t going to last. They’re already rising, but those who signed up for adjustable rates will have to refinance if they want to change their mortgages.
Australia’s housing market is booming
Regardless of interest rates, Australia’s housing market is hot. Although, the high demand and low supply is making it hard for first-time home buyers to find a home even when they can get a low variable rate mortgage.
According to data published by the World Socialist Web Site, rents rose by 3.2% in the first quarter of 2021 because of rising house prices. For instance, the median price for a home in Sydney rose by 12.6%, which happens to be the steepest rise on record.
Variable interest rates play a key role in many home buyers’ decisions to take out a mortgage, but since the housing demand is outpacing the supply, home buyers have other things to be concerned about. The rising cost of lumber, for example, is increasing the cost of new construction homes. Construction companies are also short on labor and are turning down projects because they don’t have the employees or resources to complete the job.
Variable rate mortgages won’t stay low forever
It’s hard to predict where variable rate mortgages will be in the future, but with fixed rates on the rise we can be sure variable rates will soon follow. At least for now, Australian home buyers have the option of locking in a good deal for their interest rate, even if that rate rises in the near future.
