The fact that there are really only two types of mortgages anyway helps keep things in perspective.

1. A fixed rate mortgage is just that. You enter into a contract to borrow a specific sum for a specific time at a specific, fixed interest rate. Like many other contracts, they cost money to break.

2. Variable rate mortgages, on the other hand, allow for the interest rate to vary over the duration of the loan and, in most cases, allow for variation of the principal amount outstanding.

These two types form the basis of just about every mortgage on the market. A mortgage may be purely one or the other or some combination of the two. A switchable loan, for example, allows borrowers to move from fixed to variable or variable to fixed at certain times and under certain conditions. A mixed loan also combines the two types, but in this case a portion of the loan is taken as a fixed rate loan and a portion as a variable rate loan.

Both mortgage archetypes have features which may be advantages or disadvantages depending on a borrower’s circumstances and preferences.

The main advantage of a fixed rate mortgage is interest rate and repayment predictability, a big plus when it comes to planning and protection against possible rate rises. On the other hand, fixed rate mortgage terms are relatively inflexible and generally have terms of less than five years. There is usually a penalty - known as a break cost - should the borrower wish to terminate a fixed rate mortgage before the final due date. These break costs can make it untenable to move from a fixed rate to a variable to take advantage of any fall in interest rates. Switchable mortgages provide some flexibility under certain conditions, but generally only allow for movement from variable to fixed and not fixed to variable except at the end of the agreed fixed rate period.

Variable rate mortgages do enable borrowers to enjoy eductions in interest rates, but they also expose the borrower to additional, often unexpected, payment increases should rates rise. For many owner-occupier borrowers, the ability to make unscheduled repayments of principal without penalty - and thereby generate substantial savings in interest not paid - is the real great attraction of a variable rate home loan.

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