Variable (principal and interest) loan

What are variable loans?

The rate charged on a variable loan moves up or down in accordance with movements in interest rates, as set by the Reserve Bank. This is unlike a fixed rate loan where the rate is locked down, or fixed, for a set period of time. 

Basic variable loans generally have fewer loan features than a standard variable loan - and as a result, may then have a lower rate. This type of loan tends to suits those who are cost focused and not looking for the flexibility and options that are often offered with a standard variable loan. 

What are the pros and cons of variable - basic and standard - loans?

Pros:

• Repayments fall when official interest rates fall
• Standard variable loans offer flexibility and additional features, such as the ability to make additional payments, such as a redraw facility (take out any extra money that you have put in), low introductory or honeymoon rates
• Allows careful borrowers to pay off the mortgage quickly by not having any penalty for advance payouts

Cons:

• Higher interest rate is higher for standard variable loans than basic loans because they usually offer additional features
• Repayments rise when official interest rates rise