What is the difference between a flat rate and a reducing rate of interest?

Flat and reducing rates of interest are two methods of how interest can be calculated on a mortgage.

A flat rate of interest is where the rate of interest to be paid remains the same for the duration of the loan as it is always calculated against the original amount borrowed (principal).

A reducing rate of interest is where the amount of interest to be paid takes into consideration the repayments that have been made, so it is calculated against the remaining loan amount or outstanding balance, rather than the original principal amount.

On occasion, a flat rate of interest may be advertised at a lower, more appealing rate than its equivalent reducing rate. When taking a mortgage It is important to establish with the bank or your mortgage broker whether a flat or reducing rate has been applied.

For an in depth explanation of flat and reducing rates of interest, click here.