How standard is the standard variable rate?

By Karen Baldwin
March 18, 2010

Despite the fact that Australian mortgage holders seem to hold their collective breath at the beginning of every month in anticipation of the RBA’s decision, what really impacts on home-owners is the interest rate YOUR bank is charging you for YOUR home loan.

Most borrowers, thanks to bank marketing, would be familiar with the term ‘standard variable rate’.

And while all the major lenders used to offer almost exactly the same standard variable rate, the changing financial landscape of the past couple of years means there is now considerable disparity in what is on offer.

While many borrowers may mistakenly believe that the standard variable rate was similar to the RBA’s cash rate, this is far from the truth.

Each lender sets its own individual standard variable rate, this is not an industry wide measure, and it’s largely just a marketing tool.

The standard variable rate is very much the bank’s ‘premium’ rate and while it may be the most appropriate rate for some borrowers, many of that bank’s home loan products are often available at a rate that is significantly below this.

However, just what rate you end up paying can be determined by a number of factors.

Generally speaking, the more you borrow, the more scope you have to secure a lower rate. A loan of in excess of $150,000 will attract some form of discount, with many of the better rates available on loans of $250,000-plus.

With the Global Financial Crisis having made lenders increasingly risk averse in recent years, one major lender has recently announced a significantly reduced rate for borrowers with at least 25 per cent deposit or equity for a loan of at least $250,000. Other banks may well follow suit in the coming months.

Those looking for a ‘no frills’ product may be best off with what is known as a basic loan. This generally comes with a lower interest rate with no or low monthly fees attached.

In comparison, professional packages are a way of combining a loan with other bank products such as an offset account or credit card. They offer the extra benefit of discounted interest rates and lower fees but generally have an annual fee attached.

Traditionally lenders have offered reduced rates to borrowers in professions such as medicine or law, but are now also quite willing to offer similar rates to customers in a broad range of professions. When talking with your Smartline adviser, ask what reductions may be available based on your profession.

Borrowers coming out of a fixed rate period may be the most likely to be paying the standard variable rate, as this may be the ‘default’ rate that your bank uses once a fixed rate expires.

Therefore, in the lead-up to a fixed rate loan expiring, you should be thinking about what you want to do with your home loan – fix for another period, go to a basic variable rate or choose a professional package – and taking action in advance of the expiry date.

As a Smartline client, your adviser is always available to discuss your options with you.

There will probably be fees associated with doing something other than going to the ‘default’ standard variable rate, but the savings associated with paying a much lower interest rate may well negate these fees.

If you are keen to avoid paying the standard variable rate, you need to be active in managing your home loan and seeking advice.

Working with your Smartline Adviser to ensure you to get the best product and the best interest rate for your personal circumstances will save you a significant amount of money and help you to pay off your home loan much faster.

Please note that information in this publication is subject to change without notice. Smartline assumes no responsibility for any errors, omissions or mistakes in this document. © 2009 Smartline Home Loans P/L. ABN 38 085 370 270