Why Variable Rate Loans Appeal to First Home Buyers
Buying your first home is an exciting milestone, and choosing the right home loan options can make a significant difference to your financial future. For many first home buyers, a variable interest rate loan offers flexibility that a fixed interest rate simply can't match.
With a variable interest rate, your repayments can change when the lender adjusts their rates. While this might sound unpredictable, variable rate loans typically come with features that can help you pay off your mortgage faster - particularly the ability to make extra repayments without penalties.
Understanding Extra Repayments
Extra repayments are additional payments you make on top of your regular mortgage instalments. Even small amounts can shave years off your loan term and save you thousands in interest.
Let's say you've secured a home loan with a 10% deposit through the First Home Loan Deposit Scheme. If you can afford to pay an extra $200 per week on a $500,000 loan, you could potentially save over $100,000 in interest and reduce your loan term by several years.
Most variable rate loans allow unlimited extra repayments, giving you the freedom to pay more when your budget allows. This flexibility is particularly valuable for first home buyers whose income might increase over time.
Key Features That Work With Extra Repayments
When you apply for a home loan, it's worth understanding these features that complement extra repayments:
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 mortgage. If you have $20,000 in your offset account and owe $400,000 on your home loan, you'll only pay interest on $380,000.
Redraw Facility
A redraw facility lets you access the extra repayments you've made on your loan. This provides a financial safety net - you can pay ahead when times are good, then redraw those funds if you face unexpected expenses.
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When to Prioritise Extra Repayments
Knowing when to make extra repayments requires looking at your overall financial situation:
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After receiving your first home owner grants (FHOG) - If you've received grants or first home buyer stamp duty concessions, consider putting this money straight onto your mortgage
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When interest rates rise - Extra repayments become more valuable when interest rate increases push up your minimum repayment amount
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Before major life changes - Paying ahead before starting a family or changing careers can provide breathing room later
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After receiving bonuses or tax returns - Lump sum payments can significantly reduce your principal balance
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During your pre-approval period - Understanding your first home buyer budget early helps you plan for extra repayments from day one
Calculating Your Extra Repayment Capacity
Before committing to extra repayments, assess your first home buyer budget carefully. Your borrowing capacity isn't just about getting approved - it's about sustainable repayments.
Consider these questions:
- Can you maintain extra repayments if interest rates increase?
- Do you have emergency savings separate from your mortgage?
- Are there other debts with higher interest rates you should prioritise?
- Will you need funds for home improvements or repairs?
Many first home buyers find success by starting with modest extra repayments and increasing them as their income grows.
Low Deposit Options and Extra Repayments
If you've entered the property market with a 5% deposit or accessed the Regional First Home Buyer Guarantee, you're likely paying Lenders Mortgage Insurance (LMI). Making extra repayments becomes even more valuable in this situation.
By reducing your loan-to-value ratio (LVR) below 80% faster, you can potentially refinance and remove LMI from your loan structure. This strategy can save you significant money over the life of your first home loan.
Gift Deposits and Extra Funds
If you've used a gift deposit from family to boost your deposit, you might have additional savings capacity. Before putting everything into extra repayments, ensure you've built an emergency fund covering at least three months of expenses.
The first home super saver scheme might have helped you save for your deposit, and maintaining good savings habits after settlement can help you make consistent extra repayments.
Comparing Fixed vs Variable for Extra Repayments
While this article focuses on variable interest rate loans, it's worth noting the difference when it comes to extra repayments:
- Variable rate loans typically allow unlimited extra repayments
- Fixed interest rate loans often cap extra repayments at $10,000-$30,000 per year
- Some borrowers split their loan between fixed and variable to balance certainty with flexibility
Your first home loan application should reflect your intentions around extra repayments. A mortgage broker can help structure your loan to match your repayment goals.
Making the Most of Your Home Loan
As you progress through your first home buyer checklist, remember that the initial first home loan application is just the beginning. How you manage your mortgage over time determines your financial outcomes.
Regular reviews with your mortgage broker can identify opportunities for interest rate discounts or better loan structures. A loan health check every year or two ensures your home loan still meets your needs.
If you're ready to explore your home loan options or want to understand how extra repayments could work with your first home buyer eligibility, speaking with an experienced broker can clarify your options.
Call one of our team at Plavin Finance or book an appointment at a time that works for you. We work with clients in Carnegie and across Australia to find home loan solutions tailored to your circumstances.
