Types of mortgages
There are lots of different types of mortgages with varying interest rates, structures and fees. Getting the right structure at the best rate can save you a lot of money in the long run – so it’s important to understand what will be best for you. Of course we’ll talk you through this, but the more you understand, the better off you are.
A fixed rate means the interest you pay is fixed at a particular % for a specified time – between 6 months and 5 years. At the end of that time, you can choose to refix or go onto a floating rate.
You know how much you’ll pay every month for the term.
Rates are competitive between lenders.
Rates are often lower than the floating rate.
There is always the risk that rates will drop lower than the rate you’re fixed at.
If you want to make extra payments you may be charged a fee.
You may be charged a ‘break fee’ (which can be thousands of dollars) if you break your loan – for example if you decide to sell your property.
A floating rate changes as interest rates change – based on the Official Cash Rate (OCR). Repayments may go up or down.
Floating rate loans are more flexible generally allowing you to make extra repayments or changing the loan term.
Floating rates are generally higher than fixed rates.
If rates go up, you may find repayments become unaffordable.
A combination of fixed and floating
You can split a loan between fixed and floating. This gives you some certainty with the fixed part as well as the flexibility to make extra repayments on the floating part.
You can also choose to split your fixed rate into different length terms. This means you don’t have a sudden increase for all of your repayments if the rates have increased since you fixed.
Table loans are the most common type of home loan. The maximum term is generally 30 years. You can choose to have the interest rate fixed or floating or a combination.
You have regular payments and a set term when the loan will be paid off.
If you have irregular income, fixed regular payments can be difficult.
Revolving credit loans work like big overdrafts – you can make payments or withdrawals up to the limit of the loan when it suits. As interest is calculated daily, by keeping the loan as low as possible, you reduce the total interest you’ll pay.
By being organised you can pay your loan off faster.
For people with irregular income, a revolving credit loan means they can make repayments when they have money available.
You need to be disciplined – if you don’t make repayments and continue to spend, you can end up in debt longer.
Normally you pay interest on the full amount of your loan. With an offset loan, any savings accounts and everyday accounts that you link to your loan reduces the amount you pay interest on. For example if you have a $300,000 loan and $25,000 in a savings account, you would only pay interest on $275,000.
Like a revolving credit lona, interest is calculated daily, so the more money you leave in your account, the less interest you will pay.
You can also link the accounts of other family members, for example parents, reducing your repayments even more.
You pay less interest and pay off your loan faster. Normally there is no fixed term.
Any linked savings account don’t earn any interest.
Interest only loan
You only pay the interest on the loan – not the principal (the original amount your borrowed) – so repayments are less. These are quite common for investment properties. Often an interest only loan will then be switched to a table loan after a few years. Otherwise at the end of the loan term, the principal needs to be repaid in a lump sum.
As you’re not paying any principal, your repayments are less – meaning you’ve got more money available for other things (such as renovations).
The total cost will be more – eventually the principal needs to be repaid.
Uncommon in New Zealand, reducing loans mean payments start high but reduce over time.
Early payments include a higher repayment of principal and total interest paid is less overall.
Higher initial payments make this lona more expensive in the short to medium term. It might be more affordable to make the same repayments under a table loan structure.