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With so many Australian home loan options being advertised today, it can be confusing trying to decide what loan package is right for you. If you are exploring options for a home loan there is a lot to consider and one of the first things to decide is whether or not a variable, fixed or split rate loan is best for you. Typically home owners lean towards choosing a variable rate mortgage. Here is everything you need to know about a variable interest rate home loan.

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A variable rate home loan is a loan that changes over time depending on what the current interest rate is. Your loan payment can go up or down at any time and is dependent on the current interest rate set by the RBA or Reserve Bank of Australia.

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Variable rate loans have been the norm in Australia for years and offer home owners flexibility through numerous benefits. To begin with, variable rate loans typically offer a cost savings over the life of the loan. This is especially true when interest rates are dropping or even when they are remaining steady.

Additionally, variable rate mortgages often offer a "honeymoon" interest rate. This is a start up loan option that gives loan holders a reduced interest rate for a set amount of time before the rates will adjust up to the regular rate. This benefit can be a life savor especially for first time home buyers.

Variable rate home loans have additional benefits including the flexibility of paying off your loan early with no additional penalty or fees. You most often have the option to make extra payments at any time or pay more in your regular monthly payment. When you have the ability to pay extra towards your loan you can save a substantial amount of money. Variable rate mortgages also tend to have less start up fees and start at a lower interest rate compared to other loan options.

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While there are numerous advantages to choosing a variable rate home loan it is also important to understand the disadvantages. If interest rates go up, your loan payment will go up. During times of unpredictable interest rate rises, having a variable rate loan can be risky. If you have a variable rate loan you will need to make sure that your budget can handle a loan payment increase.

Is a Variable Rate Home Loan Right For You?

Now that you have a better understanding of how the interest rate works on a variable rate home loan, you can make an educated decision on whether or not this type of home loan is right for you. For many, a variable rate loan is a perfect option offering great starter rates along with the flexibility of paying your loan off early. For others, it is a risk that may be too big to take. If you are living on a tight budget a variable rate loan may not be the best option. If interest rates rise you could be looking at a mortgage payment that you cannot pay.