Top Tips to Understand Variable Rate Loan Fees and Costs

Understanding Variable Rate Loans for First Home Buyers

When buying your first home, understanding the various fees and costs associated with variable interest rate loans is crucial for making informed decisions. As a first home buyer in Victoria, you'll encounter numerous expenses beyond the property purchase price, and knowing what to expect can help you create a realistic first home buyer budget.

Variable interest rate loans offer flexibility that many first home buyers find appealing. Unlike a fixed interest rate that remains unchanged for a set period, variable rates can move up or down in response to market conditions. This means your repayments may fluctuate, but you'll often gain access to additional features that can save you money over time.

Key Fees When Applying for a Home Loan

Before you apply for a home loan, it's important to understand the upfront costs you'll encounter during your first home loan application process.

Application Fees: Some lenders charge an application fee when you submit your first home loan application. This fee typically ranges from $0 to $600 and covers the cost of processing your loan.

Valuation Fees: Lenders need to confirm your property's value, which usually costs between $200 and $600 depending on the property type and location.

Settlement Fees: These cover the administrative costs of finalising your loan, generally ranging from $150 to $400.

Lenders Mortgage Insurance (LMI): If you're purchasing with a 5% deposit or 10% deposit, you'll likely need to pay LMI. This insurance protects the lender if you default on your loan. For low deposit options, LMI can add thousands to your costs - for instance, on a $500,000 loan with a 5% deposit, LMI could cost anywhere from $10,000 to $20,000.

However, first home buyers in Victoria may be eligible for LMI waivers or reductions through schemes like the First Home Loan Deposit Scheme or the Regional First Home Buyer Guarantee.

Ongoing Costs of Variable Rate Loans

Beyond the initial fees, you'll need to budget for ongoing costs throughout the life of your loan.

Monthly Repayments: Your principal and interest repayments will vary based on your loan amount, interest rate, and loan term. With variable interest rate loans, these amounts can change when your lender adjusts rates.

Account Keeping Fees: Some lenders charge monthly account fees, typically between $10 and $15 per month, though many now offer loans without these fees.

Annual Package Fees: If you opt for a package that bundles your home loan with other products, you might pay an annual fee ranging from $300 to $400.

Understanding First Home Buyer Stamp Duty Concessions

One of the significant costs when purchasing property is stamp duty. Fortunately, Victoria offers first home buyer stamp duty concessions that can substantially reduce this expense.

First home buyers purchasing properties up to $600,000 may be exempt from stamp duty, while properties valued between $600,000 and $750,000 may receive partial concessions. These concessions can save you tens of thousands of dollars, making them a critical component of your first home buyer budget.

Additionally, eligible first home buyers may access first home owner grants (FHOG) when purchasing or building a new home in regional Victoria. These first home buyer grants can provide up to $10,000 towards your purchase.

Features That Add Value to Variable Rate Loans

While variable rate loans come with certain costs, they also offer features that can provide significant financial benefits.

Offset Account: This is a transaction account linked to your home loan. The balance in your offset account reduces the amount of interest you pay on your loan. For example, if you have a $400,000 loan and $20,000 in your offset account, you'll only pay interest on $380,000.

Redraw Facility: If you make extra repayments on your loan, a redraw facility allows you to access those additional funds if needed. This provides flexibility while still reducing your interest costs.

No Break Costs: Unlike fixed interest rate loans, you won't face break costs if you decide to switch lenders or pay off your loan early.

Interest Rate Discounts: Many lenders offer interest rate discounts for various reasons, such as being a first home buyer, having a larger deposit, or bundling products.

Creating Your First Home Buyer Checklist

Before you proceed with your home loan application, ensure you've covered these essential steps:

1. Check your first home buyer eligibility for government schemes and concessions
2. Research Home Loan options from multiple lenders
3. Understand your borrowing capacity using our borrowing capacity calculator
4. Save for your deposit - whether that's a 5% deposit through government schemes, a 10% deposit, or more
5. Consider whether a gift deposit from family can help boost your deposit
6. Gather required documentation including payslips, tax returns, and bank statements
7. Obtain pre-approval before you start house hunting
8. Consider the first home super saver scheme to boost your deposit

Government Schemes to Reduce Your Costs

As a first home buyer, you have access to several government initiatives designed to make purchasing more affordable:

First Home Loan Deposit Scheme: This scheme allows eligible first home buyers to purchase a property with as little as a 5% deposit without paying LMI.

Regional First Home Buyer Guarantee: Similar to the above scheme but specifically for properties in regional areas, offering the same LMI waiver benefits.

First Home Super Saver Scheme: This allows you to make voluntary superannuation contributions and later withdraw them (along with associated earnings) to put towards your first home deposit.

These schemes can substantially reduce the upfront costs of buying your first home, making homeownership more attainable.

Getting Pre-Approval for Your First Home Loan

Before you start seriously looking at properties, obtaining pre-approval is a valuable step. Pre-approval gives you:

• A clear understanding of how much you can borrow
• Confidence when making offers on properties
• A head start on the loan process once you find the right home
• Insight into which Home Loan options suit your circumstances

At Abundance & Beyond, we specialise in helping first home buyers understand the full range of home loans available to them, ensuring you find a solution that aligns with your financial situation and goals.

Making an Informed Decision

When choosing a variable rate loan, consider the total cost of the loan over time, not just the advertised interest rate. Compare:

• Upfront fees and ongoing costs
• Available features like offset account and redraw facilities
• Interest rate and potential for fluctuation
• Flexibility to make extra repayments
• Your eligibility for first home buyer concessions and grants

Remember that the lowest interest rate doesn't always mean the lowest overall cost. A loan with a slightly higher rate but no ongoing fees and valuable features might save you more money over the life of your loan.

Understanding the fees and costs associated with variable rate loans is an essential part of your journey as a first home buyer. By familiarising yourself with these expenses and taking advantage of available concessions and schemes, you can make confident decisions about your first Home Loan.

Call one of our team or book an appointment at a time that works for you. We're here to guide you through every step of your first home buying journey.