.svg)
Variable-Rate Home Loans
Written by
Kervin Mathew
Edited by
Ellie Garran
Reviewed by
Sam HymanWe’ve partnered with Aussie, who’ve helped 1.5 million Australians and counting
iSelect Mortgages Pty Ltd is a credit representative (Credit Representative 400540) of Lendi Group Distribution Pty Ltd (Australian Credit Licence 246786). iSelect Mortgages Pty Ltd receives a commission from Lendi Group Distribution Pty Ltd, the licensee for each new customer account created and for each home loan submitted through this service. Learn more.
What is a variable-rate home loan?
A variable-rate home loan comes with an interest rate that is prone to change. There’s plenty that can influence how much interest you pay on your variable-rate home loan. It could be changes in the market or the Reserve Bank of Australia (RBA) hiking the official cash rate.
Why choose a variable-rate home loan?
Why deal with all the uncertainty? For starters, it tends to start off with a lower interest rate than a fixed-rate home loan. Added to that, a variable-rate home loan could come with a roster of features that you could use to your advantage – more about these as you read on.
What might paying off an interest-only loan look like?
In March 2025, variable interest rates were at 6% and 6.1% for new and outstanding loans respectively.1Reserve Bank of Australia – Lenders’ Interest Rates In May 2025, the official cash rate decreased from 4.1% to 3.85%.2Reserve Bank of Australia – Cash Rate Target
To understand how the cash rate and interest rates work together, it helps to know that:
- banks themselves need to borrow from other banks, and the cash rate is the interest rate they pay for this
- the cash rate can end up influencing the home loan interest rates offered to the end consumer – you
- banks tend to treat the cash rate as a benchmark and can choose to ignore the recommended cash rate.
What features can you get with a variable-rate home loan?
With variable-rate home loans, you could access a bunch of extra features that you could use to your advantage.
Offset account
An offset account reduces the interest you pay on a home loan. If you have, say, $20,000 stowed away in an offset account and your loan balance is $100,000, you only pay interest on $80,000.
Payment flexibility
You can make additional payments on top of your minimum repayments to help pay off your loan early.
Redraw facility
A redraw facility lets you make extra payments towards your home loan – and then withdraw them later if you need to.
Repayment holidays
Need some extra cashflow? You might be able to temporarily pause any direct debit home loan repayments.
How much will a rate increase affect my repayments?
It depends on how much the interest rate increases or decreases. Here’s an example of how a 0.50% variation in the interest rate can impact your monthly repayments and, not to mention, your total outflow.
Evidently, a change of just 0.5% to your mortgage’s interest rate could have you paying a lot more. Or less, if the interest rate goes down.
When the incomparable Sinatra sang, ‘You’re riding high in April, shot down in May’, his inspiration may as well have been a variable-rate home loan. That’s because:
- interest rate changes are unpredictable. There’s no conclusive way of knowing when interest rates will rise or fall.
- the RBA’s cash rate has ranged from as low as 0.10% in 2020 to 4.35% in 2024.3Reserve Bank of Australia – Cash Rate Target
Keep an eye out for the media release is issued at 2.30 pm (Sydney time) after each Reserve Bank board meeting. It will indicate any changes in the cash rate taking effect the next day.
| Interest rate | 6.00% per annum | 6.5% per annum |
| Loan amount | $500,000.00 | $500,000.00 |
| Loan term | 25 years | 25 years |
| Monthly repayments | $3,222.00 | $3,376.00 |
Note: This is a general example. This table should not be relied on for your personal situation.
Variable-rate home loans explained
Learn all about variable-rate home loans, including the benefits, what to look for, and how iSelect can ‘lend’ a helping hand.
Variable-rate home loans vs fixed-rate home loans
Variable-rate home loans
With a variable-rate home loan, you’ll find that you have more flexibility, but that comes at a cost. Before you decide to go with one, it’s important to weigh up the benefits and downsides.
Pros
- Potential to make additional repayments
- Easy refinancing at any time
- Potential rate decreases
Cons
- Potential rate rises
- More difficulty with budgeting
- Temptation to overborrow when rates are low
Fixed-rate home loans
Fixed home loans lock you into a set interest rate for a certain period of time, giving you certainty about what you’ll pay for in that duration. But that means you’re also stuck with what you have when the grass may grow lusher and greener on the other side.
Pros
- Certainty around repayments
- Protection from interest rate rises
- Confidence around budgeting and financial planning
Cons
- Potentially higher interest rates
- Penalties for early repayment or refinancing
- Fewer features and limited flexibility
- Ignores decreases in cash rate
Will interest rates go down anytime soon?
One of the reasons the official cash rate (OCR) exists is to manage inflation. If inflation is high, the RBA board generally tackles it by hiking the OCR. When inflation decreases, the RBA might decide to loosen the reins on the cash rate. This could influence banks and lenders to lower interest rates on home loans. So, it may be wise to keep a keen ear to the ground when it comes to cash rate movements.
What factors can affect the interest rates on variable-rate home loans?
Lenders can look at some of these (and more) factors when deciding interest rates.
Official cash rate (OCR)
Interest rates offered by bankers and lenders tend to reflect movements in the OCR, which is set by the Reserve Bank.
Lender funding costs
Lenders have to borrow money too, and their borrowing costs flow on to their lending rates.
Loan repayment type
If you go with interest-only repayments, they can feature higher interest rates than a garden variety principal-and-interest home loan.
Loan-to-value ratio (LVR)
Your LVR is the percentage of a property’s value that you borrow from the lender. A higher LVR typically means a higher interest rate.
Helpful tip
Before you decide on a variable home loan, do a stress test: use a mortgage calculator to increase the current average interest rate by a percentage point or two. Then compare the projected repayment amounts against your budget. This can indicate whether you’re in a decent position to borrow. If you’re already battling a high-interest home loan, you could try refinancing to find one with a lower interest rate.
Sam Hyman
General Manager – National Sales, Aussie
Frequently asked questions
What are the types of variable-rate home loans?
It helps to be aware of home loan offerings in the market so you can be sure you’re getting the loan that most suits your situation. On that note, let’s dive straight into it! Here are some types of variable-rate home loans you might come across.
Standard variable-rate home loan
A standard variable-rate home loan might come with:
- variable interest rates with no penalties on extra or early repayments
- an offset account
- a redraw facility
- other bells and whistles.
While interest rates are subject to change, you get flexibility and features that could give you an advantage.
For example, if you have a secondary source of income, a healthy tax return or a welcome bonus every year, the extra money can go towards your home loan outside of your regular repayments. This would help you pay off your home loan earlier without fees or penalties.
Basic variable-rate home loan
As the name suggests, this is a no-frills, rudimentary version of a standard variable-rate home loan, with scaled-down features or none at all. In this case, however, the lack of features may serve as an advantage to some borrowers as it could mean lower interest rates and fewer or even zero ongoing fees.
Typically, a basic variable-rate home loan is suited to those who are willing to sacrifice flexibility and some of the fancy features, like an offset account, for simplicity and lower loan costs.
Introductory discount home loan
Another one where the name gives it away! In a bid to attract borrowers, lenders might offer ‘introductory’ home loans with a low interest rate for up to around two years. First home buyers might take a fancy to this type of loan to help them ease into mortgage repayments – which is perhaps why they’re sometimes referred to as honeymoon loans.
When the honeymoon ends, though, it’s likely that you’ll face a higher variable rate. Such is life, so it would help to plan ahead for when reality sets in!
Package home loan
If variable-rate home loans come with bells and whistles, you could say this one is the entire orchestra.
A package home loan is a home loan accompanied by other banking products and perks such as savings and everyday accounts, credit cards, waived fees, and discounts. You could look at it as a way to consolidate your banking costs instead of paying separately for each product.
On the downside, package home loans might not fetch you the best home loan interest rates and you might end up paying for products you don’t need or use. Additionally, the convenience of a package loan may put you off refinancing with a home loan that has a lower interest rate.
How do I compare my options to find a suitable loan?
Obviously, there’s an ocean of options out there and it can be overwhelming to navigate every single one of them. You can still see through the deluge of deals by first considering your individual preferences and then seeking out products to match them. As a start, you could look out for:
- interest rates – what they mean for your repayment amounts and how they compare with other lenders
- loan features – how you could make the most use of them and whether they would truly make a difference
- loan terms – how long you’re willing to effectively remain in debt and whether that aligns with your financial plans
- fees – what you’re paying for, how much you’re paying, and the value you’re getting out of it
- flexibility – what options are available to you, like the ability to pause repayments, and whether you see yourself needing them.
Understandably, this can be overwhelming, whether you’re a self-made real estate investor or a wide-eyed first home buyer. While it’s admirable to paddle your own canoe, you can also use iSelect to compare home loans if you’d like a little push upstream.
Would a split interest rate be better?
If you consider yourself a calculated risk-taker, this might be a way to not put all your eggs in one basket.
In a split home loan, you are splitting your home loan into two separate loans: one with a fixed interest rate and the other a variable rate. You can choose how much of your outstanding loan amount you assign to the separate loans.
Essentially, you get the best of both worlds: you know what your monthly repayments will be on the fixed portion, and if interest rates drop, you might benefit from the rates going down on the variable portion. If rates increase, the fixed portion of your home loan will remain unaffected.
Get started on comparing home loans today!
Find a home loan by comparing with iSelect’s trusted partner, Aussie.
iSelect is the trading name of iSelect Mortgages Pty Ltd (ABN 86 148 217 181). iSelect Mortgages Pty Ltd is a credit representative (Credit Representative 400540) of Lendi Group Distribution Pty Ltd (Australian Credit Licence 246786). iSelect provides a referral to Lendi Group Pty Ltd, a Credit Representative of Lendi Group Distribution Pty Ltd (Australian Credit License 246786). iSelect Mortgages Pty Ltd receives a commission from Lendi Group Distribution Pty Ltd, the licensee for each new customer account created and for each home loan submitted through this service.