When to Consider Variable Rate Loans as a First Home Buyer

Understanding Variable Rate Loans for First Home Buyers

Buying your first home is an exciting milestone, but it can also feel overwhelming when you start looking at different home loan options. One of the most important decisions you'll make during your first home loan application is choosing between a fixed interest rate and a variable interest rate. While both have their place, understanding the fees and costs associated with variable rate loans can help you make an informed choice.

Variable rate loans are popular with first home buyers because they offer flexibility and access to features that can help you pay off your loan faster. However, they come with various fees and costs that you need to understand before you apply for a home loan.

What is a Variable Interest Rate?

A variable interest rate fluctuates based on market conditions and lender decisions. Unlike a fixed interest rate that stays the same for a set period, your variable rate can go up or down throughout the life of your loan. This means your repayments might change, which is something to factor into your first home buyer budget.

The advantage? When rates drop, so do your repayments. Plus, variable rate loans typically come with features that fixed rate loans don't offer.

Key Features of Variable Rate Loans

Variable rate loans often include valuable features that can help you manage your mortgage more effectively:

Offset Account

An offset account is a transaction account linked to your home loan. The balance in this account offsets the interest charged on your loan. For example, if you have a $400,000 loan and $20,000 in your offset account, you'll only pay interest on $380,000. This can save you thousands over the life of your loan.

Redraw Facility

A redraw facility lets you access any extra repayments you've made on your loan. This provides flexibility if you need funds for emergencies or opportunities without applying for a separate loan.

No Fixed Rate Break Costs

Unlike fixed rate loans, variable rate loans typically don't charge you penalty fees if you want to refinance or pay off your loan early.

Understanding the Fees and Costs

When considering a variable rate loan, you'll encounter several types of fees:

1. Application Fee: Charged when you submit your first home loan application, typically ranging from $0 to $1,000
2. Ongoing Monthly Fee: Some lenders charge a monthly account keeping fee, usually between $10 to $15
3. Valuation Fee: The lender arranges a property valuation to confirm the property's worth, costing between $200 to $400
4. Settlement Fee: Charged when your loan is finalised, typically $150 to $400
5. Lenders Mortgage Insurance (LMI): If you're borrowing more than 80% of the property value, you'll likely need to pay LMI

Lenders Mortgage Insurance (LMI) and Low Deposit Options

For many first home buyers, saving a 20% deposit feels impossible. The good news is that there are low deposit options available, including loans with a 5% deposit or 10% deposit. However, when you borrow more than 80% of the property's value, lenders typically require Lenders Mortgage Insurance (LMI).

LMI protects the lender if you can't repay your loan. It's a one-off premium that can cost thousands of dollars, depending on your loan size and deposit. The cost is usually added to your loan amount rather than paid upfront.

There are ways to avoid or reduce LMI costs:

• First Home Loan Deposit Scheme: This government initiative helps eligible first home buyers purchase a property with just a 5% deposit without paying LMI
• Regional First Home Buyer Guarantee: Similar to the above but specifically for properties in regional areas
• Gift Deposit: Some lenders accept genuine savings plus a gift from family members to reach the required deposit
• First Home Owner Grants (FHOG): State-based grants that can boost your deposit

First Home Buyer Government Support

Australian first home buyers have access to several government schemes that can make entering the property market more achievable:

The First Home Loan Deposit Scheme and Regional First Home Buyer Guarantee can help you avoid LMI costs even with a smaller deposit. Each state also offers first home buyer stamp duty concessions which can save you thousands in upfront costs.

The First Home Super Saver Scheme allows you to save money for your deposit inside your superannuation fund, taking advantage of the tax benefits.

Understanding your first home buyer eligibility for these schemes is crucial when planning your purchase.

Interest Rate Discounts and Negotiation

Many lenders offer interest rate discounts for first home buyers, especially if you:

• Have a larger deposit
• Work in certain professions
• Bundle other products with your home loan
• Have a strong credit history

Don't assume the advertised rate is the final rate. This is where working with a mortgage broker becomes valuable - they can negotiate on your behalf and compare home loan options across multiple lenders.

Creating Your First Home Buyer Checklist

Before you apply for a home loan, make sure you have:

• Reviewed your first home buyer budget and calculated how much you can borrow
• Checked your first home buyer eligibility for government schemes
• Gathered required documentation (payslips, tax returns, bank statements)
• Researched first home buyer grants available in your state
• Compared variable interest rate options from different lenders
• Considered getting pre-approval to strengthen your purchasing position

Pre-Approval: Your First Step

Getting pre-approval before you start house hunting gives you confidence about your borrowing capacity and shows sellers you're a serious buyer. Pre-approval typically lasts 3-6 months and doesn't commit you to that lender.

During the pre-approval process, a broker can help you understand which home loan options suit your situation and provide clarity on the total costs involved.

Making the Right Choice

Variable rate loans offer flexibility and features that can help you pay off your first home loan faster. Understanding the fees and costs involved means you won't encounter surprises during the application process.

While the interest rate is important, it's not the only factor to consider. Features like offset accounts and redraw facilities can provide significant value over the life of your loan, even if the rate is slightly higher.

At Artisan Finance, we specialise in helping first home buyers understand their options and find the right loan structure for their circumstances. Our team takes the time to explain every fee and cost involved in your home loan application, ensuring you're fully informed before making this significant financial decision.

Whether you're exploring low deposit options, trying to understand LMI, or comparing variable versus fixed rates, professional guidance can save you time and potentially thousands of dollars.

Call one of our team or book an appointment at a time that works for you to discuss your first home buyer journey and discover how we can help you achieve your property ownership goals.