Variable interest rates
Variable interest rates generally refer to mortgages. Variable interest rates change over time depending on the official interest rates set by the Reserve Bank. If official interest rates rise, then the variable interest rate set by the lender will usually increase in line with the rise in official interest rates. Conversely, if the Reserve Bank lowers the official interest rate, then the lender will generally reduce their variable interest rates. For borrowers, this means that the amount of their monthly mortgage repayments can rise or fall at any time.
Because of the added level of uncertainty, variable interest rates are usually slightly lower than fixed interest rates. Home lenders may also offer honeymoon interest rates to entice new customers to either refinance their existing mortgage or to take out a new mortgage.
Honeymoon interest rates are variable interest rates that are lower than the normal variable interest rate. Honeymoon rates may last for 3, 6 or 12 months before reverting to the normal variable interest rate.
One advantage of variable interest rates is that they offer the borrower more flexibility than fixed interest rates. Loans with variable interest rates generally allow the borrower to make extra repayments above the normal repayment amount. This allows borrowers to repay their loan early and to reduce the total amount of interest payable over the term of the loan.