Types of interest rates

Floating / Variable

Floating rates are just what the name suggests, they float up and down relative to market movements. Your mortgage is most suited to a floating rate in a stable interest rate environment.

For’s:

  • Provides you with greater flexibility to make lump sum or full repayment without penalty
  • You can to take advantage of any downward movement in interest rates, potentially letting you pay off your loan faster by keeping your repayments at the same level

Against:

  • As the rate is floating, it can go higher than fixed term rates. If the interest rate goes up, so will your repayments which could put a squeeze on your budget

Fixed Rate

Fixed rates are typically set for terms of between 6 months and 5 years. Your loan/s can be split into two or more sub-loans so that you can apportion different fixed rate terms to each sub-loan for a spread of risk. E.g. if you had a $100,000 loan on a floating rate, you could split it into say 2 x $40,000 sub-loans, fixing one with an 18 month fixed rate and the other with say a 3 year fixed rate while keeping the $20,000 balance on a floating rate.

This is probably the best option for those who need to know exactly, what their repayments will be and for how long. Typically, there are penalties for repaying in full before the end of the fixed period and there may also be a penalty for lump sum repayments prior to expiry of the fixed term.

For’s:

  • You can’t be affected by interest rate increases, so you have the certainty of knowing exactly how much each repayment will be during the fixed term. Fixed rates can be  lower than the floating rates
  • You can spread your interest rate exposure by splitting your loan into multiple loans with different interest rate options

Against:

  • If the floating rate falls below your fixed rate during the fixed term, you continue to pay the fixed rate.
  • You might have to pay an early repayment charge if you want to make extra repayments or pay off the loan during the fixed interest rate term

Capped Rate

This is probably a good option for people who want flexibility and predictability. If the floating rate drops below your capped rate, you get the floating rate. Typically, there is no penalty for lump sum payments, early repayment of the full loan amount or increasing the amount of your monthly repayments.

For’s:

  • You never pay more than your ‘capped’ rate even if rates rise, you can pay off some or all of your loan whenever you like without incurring any additional costs, you can increase your regular repayments at any time without break costs, You can generally apply to Table, Reducing and Interest Only Loans

Against:

  • Usually is a slightly higher rate than a Fixed Rate of similar term
  • Generally only available up to 2 years

Split Rate

This is a combination of fixed and floating or capped rates. Typically, you can enjoy the predictability of a fixed rate with the flexibility to make lump sum repayments without penalty.