The rate charged on a variable loan moves up or down in accordance with movements in interest rates, as set by the Reserve Bank of Australia (RBA). Basic variable loans generally have fewer loan features than a standard variable loan. Basic variable loans are suitable if you’re looking to pay off a consistent amount over the full term of the loan, however they’re not suitable if you are looking to pay off your mortgage quickly.
Standard variable rate home loans usually provide flexibility and some options that may be beneficial to you, but they can also be riskier than other loan types if interest rates are increased. For this reason, it's important to plan and budget for increases in interest rates to make sure that you can afford your repayments moving forward.
Some variable rate loans also offer low introductory interest rates (also known as “honeymoon rates") for an initial period before switching to the standard variable interest rate.
Does the Reserve Bank of Australia determine the standard variable interest rate charged by lenders?
The Reserve Bank sets an official cash rate as part of ‘monetary policy’ to help influence the supply of Australian dollars, to stabilise prices and inflation, and to influence the level of unemployment in the country (among other things). Therefore, monetary policy helps to provide a stable and growing economy.
While the RBA may choose to decrease/increase its official cash rate to achieve these objectives, the official cash rate is ultimately used by lenders (like the major banks) to set the interest rates that you will be charged when you take out a loan. As the official cash rate moves, it influences the lenders’ cost of funds – that is, the rate the lenders pay to control their supply of money that they make available to us when we take out a loan. For example, if the RBA decides to increase interest rates, then the lenders’ cost of funds increase, so the lenders often pass these increases onto their borrowers by way of increasing the variable interest rate.