What is a variable rate?

Three parts make up the number you are quoted: a reference or benchmark rate, which tends to move with the official cash rate; the lender's margin, which covers its costs and profit; and funding or operational costs, which shift with market conditions. Change any one of those and your rate can change.

You will meet variable rates on home loans, personal loans and lines of credit, on credit cards and overdrafts, and on some business lending, though not every product responds to a market move the same way. Your loan contract and the lender's disclosure documents set out how a change is applied and how you will be told about it, so those are the pages to read before you sign.

The Reserve Bank's cash rate decisions come first: when the target changes, money market funding costs and reference rates usually shift before retail rates do. Then come the lender's own funding costs, since banks and non-bank lenders borrow in wholesale markets where the cost of money moves. Competition matters too, with lenders trimming margins to win volume or lifting them to protect returns.

Credit risk and prudential settings sit behind all of it, and APRA guidance can tighten or loosen lending conditions across the market. The practical result is lag and variation: a cut is not always passed on immediately, and few moves land one-for-one.

On an interest-only loan the repayment is the interest, so it moves one for one with the rate. On a principal and interest loan the repayment moves less, because the extra interest is re-amortised over the years left to run, and a rise also slows how fast the balance comes down. That is why the end of an interest-only period deserves planning well ahead of time.

The usual defences are a split loan, with part fixed for certainty and part variable for flexibility; an offset account, which reduces the balance interest is charged on; extra repayments with redraw, building a buffer you can reach if repayments climb; a budget buffer tested against a higher rate; and refinancing if your circumstances or the market improve. Each has a trade-off, and fixing means giving up the benefit of any future cut on that portion.