Floating Rate Mortgages

Home loans with floating interest rates are usually the most competitive rates and they're easier to refinance.

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How do floating rate mortgages work?

A floating interest rate can change whenever the lender decides to raise or lower it. Lenders might lower the rate to attract customers or because their home loan funding costs have decreased. They may raise rates if their costs go up.

But in reality lenders aren’t moving their variable rates up and down every week. And on average, floating rate mortgages tend to be cheaper than fixed rates. It’s also easier to exit a floating home loan because there are no breaking costs (unlike with a fixed rate).

Floating ratesFixed rates
  • Watch your rate. You need to keep an eye on your interest rate and consider switching if it gets too high.
  • Less to worry about. You can “set and forget” your rate and never have to worry about it changing during the fixed period.
  • Lower fees. Floating loans often come with lower fees than their fixed rate equivalents.
  • Higher fees. Fixed rate loans often have higher fees.
  • Refinancing. It’s easier to refinance a floating rate mortgage.
  • Refinancing. It’s often harder to refinance to another loan during the fixed rate period because of fixed loan break costs.
  • Extra repayments. Most floating rates allow you to make extra repayments without paying fees, helping you end your mortgage faster.
  • Limited extra repayments. Most fixed rates don’t allow you to make extra repayments.

Variable loans are more likely to have features like redraw and offset accounts, although this really depends on the product.

How do I compare variable rate loans?

Consider the following factors when comparing variable home loan rates:

  • Interest rates. A lower interest rate means lower repayments. It’s the most important aspect of a home loan. Use a repayment calculator to find out what your repayments will look like with the given interest rate.
  • Fees. A variable rate home loan can come with a range of fees. If the loan works for you and the interest rate is low, a few fees aren’t so bad. But if you can avoid fees then why pay more?
  • Features. If you will actually use them, a variable loan’s features can be useful. If you have extra savings you might want a loan with an offset account. If you want a home loan that allows you to make unlimited additional repayments, you might want to look for home loans with a free redraw facility.
  • Product types. Most variable rate loans are either basic or full-featured. A basic variable rate loan is usually a lender’s most competitive rate but the mortgage may not have features like offset accounts or redraw facilities. More full-featured loans with offset accounts often have higher rates (but not always). There are also package loans that are combined with a credit card and savings account from the same lender and introductory or honeymoon rates, which start very low but will go higher later.

If you’re looking for a more specialised type of variable home loan like some of the ones listed above, you should consider contacting a mortgage broker to get some free, expert guidance.

Image: Shutterstock

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