With which type of mortgage does the borrower's whole loan face higher repayments as soon as the lender raises its rate?
Correct Answer
D) Variable rate mortgage
A variable rate moves whenever the lender changes it, usually following the Reserve Bank cash rate and funding costs, so the whole balance is exposed to increases. Fixed loans are protected for the fixed term, split loans protect the fixed portion, and capped loans limit how high the rate can go. Variable loans are often, but not always, cheaper at the outset; in some years fixed rates have been lower.
Why This Is the Correct Answer
On a variable rate loan the lender can change the rate at any time, so the borrower carries all of the interest rate risk and repayments on the whole balance rise when rates rise.
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