What Is a Variable Interest Rate & How Does It Work?

Understanding how interest works is an important part of comparing borrowing options in Australia. If you’re researching loans, you’ve probably come across the question: what is a variable interest rate, and how is it different from a fixed rate?

In this guide, we explain the variable interest rate meaning, how lenders set these rates, when it may (or may not) suit you, and how variable rate loans compare to fixed ones. We’ll also introduce Credit24’s fixed-rate personal loans for people who prefer repayments that don’t change over the loan term.

(If you’d like to read more about how rates work generally, you may find this helpful: What is an interest rate? https://www.credit24.com.au/blog/what-is-interest-rate)

What is a variable interest rate?

A variable interest rate is an interest rate that can go up or down over the life of a loan. If the rate changes, your repayment amount may also change. This can make the cost of the loan less predictable over time compared with a fixed rate.

Key characteristics of variable interest rates:

• They can change over time
• The lender may adjust them during your loan term (usually with notice)
• Changes can affect your repayment amount
• They’re common in home loans, some personal loans, and some credit cards

In short, a variable interest rate may offer flexibility, but it can also create uncertainty.

How do variable interest rates work?

Lenders set variable rates using a mix of factors such as economic conditions, funding costs, and competition. One influence is the Reserve Bank of Australia (RBA) cash rate, because it affects borrowing costs across the financial system.

It’s also important to know that lenders may change their rates for reasons other than RBA movements (for example, changes to their own costs).

How repayment amounts can change (simple example)

Even small rate changes can affect repayments. For example, on a $400,000 loan over 30 years (illustrative only, not a quote):

• At 3.5%, repayments might be around $1,796 per month
• At 4.0%, repayments might be around $1,910 per month (about $114 more)
• At 3.0%, repayments might be around $1,686 per month (about $110 less)

These figures are simplified and don’t include all costs or account for individual loan features. Actual repayments depend on your loan amount, term, fees and charges, and the rate applied.

Factors that influence variable interest rate changes

Variable rates can move for a range of reasons, including:

1. RBA cash rate movements

The RBA may raise or lower the cash rate in response to inflation, employment trends, and economic growth.

2. Lender funding costs

Banks and lenders have their own costs of accessing funds. If these costs change, rates may change too.

3. Market competition

Lenders may adjust rates to remain competitive or reflect changes in the market.

4. Borrower risk profiles

Different products and applicant circumstances can be priced differently depending on risk and lending criteria.

5. Economic conditions

Broader conditions—like inflation or economic slowdowns—can influence interest rates across the economy.

Pros and cons of variable interest rates

Pros

Flexibility to make extra repayments (in some products)
Some variable-rate loans may allow extra repayments, which could help reduce interest over time. Always check your loan terms for limits or fees.

Potential for repayments to reduce if rates fall
If the interest rate decreases, repayments may decrease too (depending on the loan structure).

May be easier to refinance or switch (depending on the lender and product)
Some variable-rate products may have fewer restrictions if you want to switch, but fees and charges can still apply.

Access to features (common in home loans)
Some variable home loans may include features like redraw or offset accounts, depending on the product.

Cons

Repayment uncertainty
If rates rise, repayments can increase, which can make budgeting harder.

Higher risk when rates are rising
Rapid increases can place pressure on household budgets.

Less predictable total cost
Because rates can change, it may be harder to estimate the total interest you’ll pay across the full term.

Variable vs fixed interest rates: Key differences

Here’s a simple comparison (general guide only—features vary by lender and product):

Rate stability

• Variable: can rise or fall
• Fixed: locked for a set period or the full term (depending on the product)

Extra repayments

• Variable: often more flexible
• Fixed: may be limited or restricted (or have fees), depending on the terms

Costs to exit early

• Variable: may be lower in some cases
• Fixed: may involve higher break costs if you end the loan early (depending on the product)

Loan features

• Variable: may offer more flexibility in some products
• Fixed: may be more limited in features

Budget certainty

• Variable: less predictable
• Fixed: more predictable

If you’re comparing both, you may also want to read:

• What is a fixed interest rate? https://www.credit24.com.au/blog/what-is-a-fixed-interest-rate
• Fixed or variable personal loan: how to choose https://www.credit24.com.au/blog/fixed-or-variable-personal-loan

When can a variable interest rate be a good choice?

A variable rate may suit you if:

• Your budget can absorb potential rate rises
• You value flexibility (for example, making extra repayments if your loan allows it)
• You may refinance or repay the loan early and want fewer restrictions (depending on product terms)
• You prefer a loan structure where repayments can move with the market

A variable rate may not suit you if predictable repayments are essential to your budget, or if you’d find repayment increases difficult to manage.

Tips for managing a variable interest rate loan

To manage a variable rate confidently, consider:

• Build a buffer (if you can): When repayments are manageable, you might set aside extra funds to help if rates rise later.
• Understand your repayment structure: Check whether your repayments change automatically, and how often.
• Keep an emergency fund: A savings buffer can help if expenses rise or income changes.
• Stay informed: Following RBA announcements and broader economic news can help you understand why rates may move.
• Review your loan regularly: Compare your rate and fees over time and consider whether the product still meets your needs.

If you’re paying via instant bank transfer, you may also see this referred to as OSKO payments (availability depends on your bank and the lender’s payment options).

Want to avoid uncertainty? Meet Credit24 fixed rate personal loans

If you prefer repayments that don’t change, a fixed-rate personal loan may suit your budgeting style. Credit24 personal loans are offered with a fixed interest rate for the loan term, which means the interest rate stays the same during that term.

Why choose Credit24 personal loans?

Depending on eligibility and the product details, Credit24 personal loans may offer:

• Fixed interest rate for the loan term
• A clear repayment schedule (so you know what’s due and when)
• Transparent fees and charges (check the product details for what applies)
• A fully online application process
• Loan amounts up to $10,000 (subject to eligibility and lending criteria)
• Assessment in line with responsible lending obligations under our Australian Credit Licence

Apply now: https://www.credit24.com.au/au/apply/login

Disclaimer
IPF Digital Australia Pty Ltd, trading as Credit24, ABN 59 130 894 405. Australian Credit Licence 422839. The information in this article is general in nature and does not consider your objectives, financial situation, or needs. Lending criteria, fees, and charges apply. For product details, eligibility requirements, and full terms and conditions, visit www.credit24.com.au.