Repayment structure : Mortgage types

Table loan

This is the most common type of home loan. You can choose a term up to 30 years with most lenders. Most of your early repayments pay off the interest, while most of the later payments pay off the principal (the lump sum 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.

Advantages:

• Table loans provide the discipline of regular payments and a set date when they will be paid off.
• They provide the certainty of knowing what payments will be, unless you have a floating rate, in which case repayment amounts can change.

Disadvantages:

• Fixed regular payments might be difficult for people with irregular income.

Revolving credit loan

Revolving credit loans work like a large 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 you can at any time, you pay less interest because lenders calculate interest daily.

You can make lump sum repayments and re-draw 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.

Advantages:

• If you're well organised, you can pay off your mortgage faster. This also suits people with uneven income as there are no fixed repayments.
• Putting surplus funds into this account rather than a separate savings account will give bigger interest savings and also avoids the tax on the savings account interest.

Disadvantages:

• You need discipline. It can be tempting to always spend up to your credit limit and stay in debt longer.

Reducing loan

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.

Advantages:

• You pay less interest overall than with a table loan because early payments include a higher repayment of principal.
• These may suit borrowers who expect their income to drop, for example, if one partner plans to give up work in a few years time.

Disadvantages:

• If you can afford higher payments you would be better to take a table loan with payments high for the whole term, so you’ll pay less interest.

Interest-only

You pay the interest-only part of your 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.

Advantages:

• You have more cash for other things, such as renovations.

Disadvantages:

You will still owe the full amount that you borrowed until the interest-only period ends and you start paying back the loan.