How to Understand Variable Rate Loan Fees and Costs

Your variable rate home loan will cost more than the monthly repayment. Fees, upfront costs and the rate itself all shape what you pay, so it pays to know them before you sign.

If you are buying your first home, the repayment figure on a lender's website is only one piece of the puzzle. Let's walk through the costs you can expect and the ones you can control.

What Fees Come With a Variable Rate Home Loan?

A variable rate loan can carry upfront fees, ongoing fees and exit fees, and they differ from lender to lender. Always ask for the full fee schedule before you compare rates.

Common fees include an application or establishment fee, a monthly or annual package fee, and a discharge fee when you close the loan. Some lenders waive certain fees, but features like an offset account may come with an ongoing fee. The trade-off is straightforward: a loan with more features can cost more each year, so it only makes sense if you will actually use them.

A lower rate with high fees can end up costing more than a slightly higher rate with none. Ask your broker to compare the comparison rate as well as the headline rate, because the comparison rate folds in many fees.

How Does a Variable Interest Rate Change Your Repayments?

With a variable rate, your lender can raise or lower the rate over time, and your minimum repayment moves with it. That gives you some flexibility, but it also means your budget can change.

As an illustration, here is a loan of $600,000 over 30 years at an illustrative rate of 6.75% p.a. The principal and interest repayment comes to about $3,891 a month. If the rate rose by 1 percentage point to 7.75% p.a., the repayment would be about $4,298 a month, roughly $407 more. These figures are illustrative only and are not a quote.

Build a buffer into your first home buyer budget so a rate rise does not catch you out. Our borrowing capacity page is a good place to see how lenders assess what you can afford, and they often test your loan at a higher rate than the one you are offered.

Which Upfront Costs Should First Home Buyers Plan For?

Beyond your deposit, you need to budget for stamp duty (unless you qualify for an exemption), legal and conveyancing fees, inspection and valuation costs, and loan registration fees. These are separate from your loan fees.

In Victoria, no land transfer duty is payable for an eligible first home buyer on a dutiable value up to $600,000, and a concession applies above that up to $750,000. The buyer must live in the home as their principal place of residence for at least 12 months, starting within 12 months of settlement. The Victorian first home owner grant of $10,000 applies only to new homes, up to a dutiable value of $750,000.

If you are buying with the Australian Government's Help to Buy scheme, the Government does not cover your stamp duty, legal fees, inspection and valuation fees, mortgage registration fees, settlement fees or building insurance. You still need to budget for those yourself. Our first home buyers page covers the schemes that may apply to you.

Do You Have to Pay Lenders Mortgage Insurance?

Lenders mortgage insurance (LMI) is usually charged when your deposit is under 20%, but some schemes can avoid it. The cost depends on your deposit size, loan amount and lender.

The Australian Government 5% Deposit Scheme lets eligible first home buyers buy with a 5% deposit. Housing Australia backs the lender for the part of the loan between your deposit and 20% of the property value, so no LMI is payable. Applications go through a participating lender, and there are price caps depending on location. In Victoria, the cap is $950,000 for Melbourne and Geelong and $650,000 for other areas. The scheme's published materials do not say which loan features, such as an offset account, are available, so ask your lender.

The scheme also has conditions. You must live in the property, and if you move out before the backing ends, the lender may require you to pay LMI.

How Can an Offset Account or Redraw Reduce What You Pay?

An offset account or redraw facility can cut the interest you pay by reducing the balance your interest is charged on. The trade-off is that some loans charge a fee for the feature, or a slightly higher rate.

An offset account is a transaction account linked to your loan. Every dollar in it reduces the balance your interest is calculated on. Redraw lets you pull back extra repayments you have made. Offset usually gives easier day-to-day access, while redraw access can depend on the lender's rules.

Consider a first home buyer with a $500,000 variable loan at an illustrative 6.75% p.a. who keeps $20,000 in an offset account. Interest is charged as if the loan were $480,000, so the buyer pays interest on $20,000 less. At the illustrative rate that is about $1,350 less interest over a year while the balance stays there, and it also keeps the money available. Against that, the buyer must weigh the offset account's annual fee, if the lender charges one. If the fee is $400 a year, the net benefit is about $950 a year. These numbers are for illustration only. Whether it pays off depends on how much you keep in the account.

Can You Save Deposit Money Through Super?

Yes, the First Home Super Saver scheme lets eligible people release voluntary super contributions towards a first home deposit. There are limits and tax rules, so speak to your accountant first.

The ATO applies a limit of $15,000 of voluntary contributions in any one financial year, and $50,000 in total. Released amounts are taxed, and the ATO withholds tax when it pays you. You also need to sign a contract to buy or build, or recontribute the money, within set time limits. If you miss them, extra tax can apply. Your accountant can tell you how this fits with your own tax situation.

Does Pre-Approval Cost Anything?

Many lenders do not charge for pre-approval, but check with yours. It is also not a final loan offer. It shows how much a lender may let you borrow, and it comes with conditions and an expiry date.

A pre-approval helps you set a realistic price range and act with confidence at auctions or in negotiations. The conditions can change if your income, debts or the lender's policy change, so check it is still valid before you make an offer. If you are buying with Help to Buy, the Housing Australia conditional approval reserves your place for up to 90 days.

If you already hold a loan and want to see how it stacks up, our loan health check can help you spot fees you may be paying.

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