Basic Variable vs. Standard Variable Rate Home Loans - What's the difference?

From amortisation schedules to loan-to-value ratios, plenty of terms can perplex home loan borrowers. Two that pop up a lot are standard variable rate and basic variable rate home loans. While the pair might appear synonymous at first glance, in practice, this is far from the case.

A standard variable rate is typically a lender’s default variable rate and is used to price its home loan book. It’s also the rate to which a borrower might automatically switch after a fixed-rate period concludes, or the one a borrower might default to on the expiry of a discount period. 

On the other hand, a basic variable rate home loan is a common name for a specific mortgage product. Normally, a lender’s basic variable rate home loan represents its most stripped-down, or 'basic', mortgage option. It’s normally designed to provide borrowers with a straightforward, no-frills financing solution, and might come with a lower rate than other products. 

If you’re wondering how variable rates differ from fixed rates, check out our guide on the main types of home loans in Australia.

What is a standard variable rate?

Most lenders will advertise a standard variable rate. It’s sometimes abbreviated to SVR or called a ‘reference interest rate’.

The standard variable rate is generally the rate a lender considers when pricing other home loan interest rates within its product line up.

“Rarely ever do you see anyone paying the standard variable,” Little Red Shoes mortgage broker Rebecca Jarrett-Dalton told Your Mortgage. 

“It’s just used as a reference rate in order to calculate discounts.

“Most people are getting a discount.”

Speaking to Your Mortgage in April 2024, Ms Jarrett-Dalton said many of the big banks’ standard variable rates currently sit at around 9% p.a. 

That’s compared to the average variable interest rate on a new owner-occupied home loan – 6.3% p.a. as of February 2024, according to Reserve Bank of Australia (RBA) figures.

One common way a borrower might find themselves on a standard variable rate home loan is on the expiry of their fixed rate period. In such cases, a homeowner might be automatically charged a lender’s standard variable rate.

However, Ms Jarrett-Dalton notes many lenders offer borrowers facing the ‘fixed rate cliff’ a discounted variable rate, presumably in order to secure their business. 

Perhaps confusingly, many lenders have been known to name their basic home loan product something along the lines of ‘standard variable rate home loan’. On that, let’s consider the definition of a basic variable home loan.

What is a basic variable home loan?

A basic variable home loan, on the other hand, is typically a product in itself. 

This type of mortgage is generally appealing to homeowners who wish to keep their costs down or who want a simple home loan product without any bells and whistles.

“Many of these offer interest rates up to 3% lower than a lender’s standard variable rate,” Ms Jarrett-Dalton said. 

She notes basic variable rates typically offer fewer features – for instance, they will rarely come with an offset account – and generally don’t demand many or any ongoing fees.

These days, most basic variable rate home loans also offer unlimited extra repayments and redraw facilities.

For those who require a little more flexibility, such as property investors, a more feature-rich home loan might be more suitable. They might appreciate the addition of an offset account, for instance, even if it means paying higher annual fees or securing a less competitive interest rate.

A variable rate home loan won’t suit every borrower, either.

A fixed rate home loan promises peace of mind, allowing borrowers to ‘lock in’ an interest rate for a set amount of time. Though, Ms Jarrett-Dalton warns a person signing onto a fixed rate won’t be able to realise the benefits of rate cuts if and when they occur. Additionally, fixed rate loans typically restrict how much extra a borrower can repay, thereby limiting their flexibility.

Competitive basic variable rate home loans on the market now

If a basic variable home loan product sounds right for you, we’ve compiled some of the lowest rate offerings available at the moment.

Important Information and Comparison Rate Warning

How do lenders set their standard variable rates?

All that might lead one to wonder, ‘what factors do banks consider when they set standard variable rates for home loans?’

A lender’s product team takes into account many factors when deciding the rates for borrowing and saving. 

According to Ms Jarrett-Dalton, market price and profit margins are two of the most crucial considerations pondered. Let’s take a closer look at those two factors:

1. Market price This refers to the competitive landscape. Banks need to offer rates that are attractive enough to draw customers but high enough to ensure profitability. Simply put, if other banks offer lower rates, a bank may lower its rates too to stay competitive.
2. Profit margins Banks typically aim to make a profit. To do so, they must set rates that cover their costs, including what it costs them to borrow money (influenced by the RBA cash rate), and still leave room for profit. 

How the RBA cash rate impacts standard variable rates 

Let’s get technical on how the RBA cash rate plays in here.

The RBA cash rate is the interest rate banks must pay each other to borrow funds overnight.

Australian regulations dictate banks must hold a certain amount of their customers’ deposits at the end of each day so they can meet any demand for cash.

Throughout a given day, a bank will engage in numerous transactions that impact its cash position – such as providing funds for customer withdrawals, transacting payments, and providing loans.

Some days, a bank might find that outgoing transactions outweigh incoming transactions. To cover the resulting shortfall, it may borrow money from other banks overnight.

The cash rate is what it must pay other banks to do so. 

When the RBA cash rate is low, it’s cheaper for banks to borrow money overnight. Consequently, they’re likely to lower the interest rates on loans, benefiting borrowers.

So, in a low cash rate environment, a bank’s standard variable rate – and the other interest rates it uses the standard variable rate to price – will typically be lower.

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