Like the standard variable loan, the basic variable home loan features an adjustable interest rate that changes according to the rates set by the Reserve Bank of Australia and individual lenders’ policies, fees and rates. Where this loan is considered “basic” instead of standard is in the features available to the borrower. This is typically a no-frills loan with a lower interest rate but less features for the home buyer to take advantage of. If the borrower needs a certain feature, such as the ability to make larger payments or more of them penalty-free, they can be added individually for a fee, depending on which features the given lender makes available.
More About the Basic Variable Home Loan
The basic variable rate home loan is also a popular loan product, though not as much as the standard variable rate loan. Rather than pay a loan with a fixed interest rate, borrowers who take out a basic variable rate loan pay an interest rate that changes regularly according to the Reserve Bank of Australia’s monetary policy in addition to fees and rates set by the loan’s particular lender. Basic variable rates are deemed “basic” because they do not come with the additional features seen in standard variable rate loans.
Advantages of Basic Variable Rate Home Loans
Much like the standard variable rate home loan, the advantage of a basic variable rate home loan is that its rate fluctuates with the Reserve Bank of Australia. Should interest rates drop, the amount a home owner pays goes down as well. A variable loan’s interest rate and payments can and do go lower than those of fixed rate loans at times.
Another advantage of a basic variable rate home loan is the fee structure. Due to this loan’s bare bones nature, borrowers are not charges loan set-up fees like those seen with a standard variable rate loan. Borrowers who choose the basic variable loan do not have access to the same features as a standard variable loan, but they don’t have to pay for these features, either. As such, the basic variable rate loan is often the cheapest loan to start.
Disadvantages of Basic Variable Rate Home Loans
Just like you see with the standard variable rate loan, the biggest advantage of a basic variable rate loan is also a great disadvantage. The loan’s variable rate means the borrower is gambling against the market. If the Reserve Bank of Australia’s rate stays the same or goes down, the borrower benefits greatly. But the borrower also has to be ready for those rates to rise. Borrowers who are more organized and who plan their budgets carefully, or home buyers who don’t like to gamble in an uncertain market, may not find a variable rate loan as an attractive option.
A basic variable rate loan does not have the features built in that a standard variable rate loan does. This means a borrower who wishes to make bigger or more frequent payments may incur penalties from the lender. The option to convert the loan to a split loan will not be there, either. Basic variable rate borrowers might be able to add features as needed and pay additional fees during the set-up process, but this is at the discretion of individual lenders. For more information about the pros and cons of basic variable rate home loans, and to get help deciding which loan type is right for you, please fill out the contact form below.