Like its basic no-frills counterpart, standard variable loan products move up and down with the official cash rate set by the Reserve Bank of Australia. When the RBA alters the official cash rate most variable home loan interest rates change by a similar, if not identical, amount. However, the major banks have recently moved out of sync with the RBA and have raised their mortgage rates higher than the official rate rise. For example, Westpac increased its standard variable rate by almost double the rise amount after one of the recent RBA rate hikes.
Borrowers with a variable interest rate will be relatively better off than borrowers with a fixed interest rate when interest rates fall, because their variable rate is likely to move lower while the fixed rate will remain unchanged.
Standard variable is like the cheeseburger of the loan world and is the most sought-after because it’s easy to compare in terms of rates, and it comes with all of the bells and whistles that you can imagine.
Those bells and whistles can include offset accounts – where you place any savings in an account that is linked to your loan, to ‘offset’ the amount of interest you pay. If used properly, this facility can help you reduce the interest you pay and shorten the loan term. At the very least, standard variable loans allow you to make extra repayments and offer a redraw facility.
Standard variable mortgages are ideal for all borrowers and first homebuyers can greatly benefit from their flexible features. However, they can be more expensive than the basic variable loans.
First homebuyers opting for standard variable loans should ensure they can service their loans should rates increase. Allow for at least a 2% rise when budgeting for repayments.
As the name indicates, the rates for these loans will fluctuate in line with the official Reserve Bank of Australia cash rate, on which lenders base their individual interest rates. Most lenders allow standard variable borrowers to make extra repayments and access offset or line of credit facilities.
Standard variable rates are extremely competitive with fixed rate loans – you may get a much better deal if you stay variable. These loans allow you to take advantage of lower interest rates when official rates fall.
On the flipside, you also pay the price if rates increase, although some variable rate loans can be capped so the rate will not rise beyond a certain point.
All types of borrowers, from first homebuyers to investors who can allowfor a marginal rate increase, but who wish to benefit if rates decrease.