11 Jul 2021

What Are the Disadvantages of a Variable Rate Loan?

Variable-rate mortgages sent shockwaves across Australia in 2009 when the rates rose and didn’t come back down. There aren’t disadvantages of a variable rate loan; there’s just one that’s very serious. Lenders have the right to adjust their interest rates at any time. Lending institutions are keeping up with administrative costs, making a profit, and the rates set by the Reserve Bank of Australia.

The RBA establishes a target cash rate monthly. They set monetary policy with their actions. Every month, the agency has the right to raise or lower interest rates based on the economy’s health.

An overheated economy or high unemployment rate causes government agencies to make drastic changes, including raising interest rates. Lending institutions must be able to cover their costs, so they’ll raise their interest rates too. Variable loan recipients must be ready to ride the wave when the tide goes against them. 

Higher interest rates can also cause a home’s value to drop. If the outstanding loan amount is higher than the property’s value, it causes a financial mess for the homeowner. Any equity accrued from the property gets zeroed out. Although it’s a paper value, it hurts the homeowner and their finances. 

Safeguards have been added to protect against runaway rates, but the risk still stands. You can see how interest rates impact a mortgage with our online home loan calculator.

Disadvantages of a Variable Rate Loan Conclusion

There aren’t several disadvantages of a variable rate loan; it’s just one. If rates rise, a homeowner’s repayments rise too. Whether the rates fall back down right away depends on the economy and the Reserve Bank of Australia. To find out your variable rate loan options, contact our loan specialists at Mortgage House.

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