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There are many types of mortgages, each with its own interest rate, fees and flexibility.
Each of these things affect how much the loan costs and how long it will be before it’s paid off. An interest rate can be fixed, floating or a mix of both. And there are different repayment structures to choose from. It’s enough to make anyone’s head spin, so let’s break some of these terms down…
This is the most common type of home loan. You can choose a term up to 30 years with most lenders. Most of the early repayments pay off the interest, while most of the later payments pay off the principal (the initial amount you borrowed).
You can take a table loan with a fixed rate of interest or a floating rate.
Application fees for table loans range from nothing to over $1,000. Most lenders charge around $200 to $400. This is often negotiable.
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Revolving credit loans work like a giant overdraft. Your pay goes straight into the account and bills are paid out of the account when they’re due. By keeping the loan as low as possible at any time, you pay less interest because lenders calculate interest daily.
You can make lump-sum repayments and redraw money up to your limit. Some revolving credit mortgages gradually reduce the credit limit to help you pay off the mortgage.
Application fees on revolving credit home loans can be up to $500. There can be a fee for the day-to-day banking transactions you do through the account.
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An offset mortgage setup can reduce the amount of interest you pay on your mortgage. Typically, interest is payable on the full amount of a loan. But by linking your loan to any savings or everyday accounts you already have, you pay interest on that much less. For example, someone with a $400,000 mortgage and $20,000 in savings would only pay interest on $380,000. Subtract the savings from the total loan amount, and you only pay interest on what’s left.
The more cash you keep across your accounts from day to day, the more you’ll save, because interest is calculated daily. Linking as many accounts as possible – whether from a partner, parents, or other family members – means even less interest to pay.
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Reducing or straight line mortgages repay the same amount of principal with each repayment, but a reducing amount of interest each time. These are quite rare in New Zealand. Payments start high, but reduce (in a straight line) over time. Fees are similar to table loans.
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We pay the interest-only part of our repayments, not the principal, so the payments are lower. Some borrowers take an interest-only loan for a year or two and then switch to a table loan. The normal table loan application fees apply.
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With a fixed rate home loan the interest rate you pay is fixed for a period of six months to five years. At the end of the term, you can choose to re-fix again for a new term or move to a floating rate.
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Capped rates are a variation where the interest rate can’t rise above a certain point, but will drop if floating rates drop below the capped rate.
Lenders of floating rate loans will lift or lower the interest rate as interest rates in the wider market change, normally linked to the Official Cash Rate (OCR). This means your repayments may go up or down.
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You can split a loan between fixed and floating rates. This lets you make extra repayments without charge on the floating rate portion.
Splitting a loan can give you a balance between the certainty of a fixed rate and the flexibility of a floating rate. How much of your loan you have in each portion depends on which of these is more important to you.
For advice on how to set up your mortgage, you may want to talk to a financial advisor who specialises in mortgages.
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