Navigating the mortgage market can feel overwhelming, especially when faced with so many options. Whether you’re buying your first home, refinancing, or investing in property, understanding the different types of home loans available is crucial to making informed decisions. The right mortgage for your situation depends on factors like your financial goals, income stability, and tolerance for changes in interest rates. Let’s break down the primary mortgage kinds, their key features, and who they’re best suited for.
Fixed Interest Rate Mortgages
A fixed-rate mortgage locks in your interest rate for a set period, providing consistent monthly mortgage payments. This stability can be beneficial in a volatile mortgage market, as you’re protected from interest rates rising during the fixed term. Fixed loans are ideal for borrowers who value predictability in their budgeting.
However, the trade-off for this stability is less flexibility. You may face early repayment charges if you want to pay off your loan early. Additionally, if prevailing interest rates drop, you won’t benefit unless you refinance. Fixed-interest rate loans are particularly suitable for those with a stable income who prefer long-term certainty.
Variable (Floating) Interest Rate Mortgages
A variable interest rate mortgage, also known as a floating rate loan, adjusts your rate based on changes in the New Zealand official cash rate or other market conditions. While these loans often start with lower interest rates than fixed-rate mortgages, they come with the risk of rates (and monthly payments) increasing over time.
On the upside, floating-rate loans offer greater flexibility. Borrowers can make lump sum repayments or extra payments without penalty, helping them pay less interest overall. These types of home loans work well for those with irregular income or who expect rates to fall in the near future.
Table Mortgages
The table loan is one of the most common mortgage types in New Zealand. It requires regular repayments that combine interest and principal over the loan term. In the early years, most of your payment goes toward paying interest, but as the outstanding balance decreases, a larger portion goes toward reducing the loan.
This mortgage type suits borrowers looking for consistent payments and a clear path to full repayment by the end of the loan term. Table loans are great for first-time buyers or those with plans to stay in their homes for the long term.
Reducing Mortgages
With a reducing loan, your repayments start higher but decrease over time as you pay off more of the principal. This type of mortgage allows borrowers to pay less interest overall, as the outstanding balance reduces more quickly compared to a table mortgage.
Reducing loans are a good fit for borrowers with higher initial incomes or those who want to save on total interest payments. It’s an efficient way to repay your loan faster, though it requires discipline to manage the higher initial payments.
Interest-Only Mortgages
Interest-only mortgages allow the borrower to pay just the interest for a specified period, with no payments toward the loan principal. This results in significantly lower monthly payments during the interest-only term, making it popular with property investors looking to maximise cash flow or borrowers with short-term financial constraints.
While these loans offer flexibility, borrowers should note that the principal balance remains unchanged, meaning you’ll ultimately pay more interest over the loan term. Interest-only loans are best for those who have a clear strategy for repaying the principal or who are focused on building their investment portfolio.
Offset Mortgages
Offset mortgages link your home loan to one or more savings accounts. The balance in these accounts offsets your mortgage balance, reducing the interest you pay. For example, if you have a $500,000 mortgage and $50,000 in savings, you’ll only pay interest on $450,000.
This type of loan can be an effective way to reduce interest payments for those who maintain significant savings. However, the benefits depend on how consistently you can keep funds in your savings account. Offset loans are particularly suitable for disciplined savers.
Revolving Credit Mortgages
A revolving credit mortgage operates like a large overdraft tied to your home loan. Borrowers can deposit income into their loan account and withdraw as needed. This setup allows you to reduce your outstanding balance—and the interest you pay—whenever you have surplus funds.
Revolving credit home loans provide maximum flexibility, but they require careful management. Without discipline, it’s easy to lose track of spending, which can extend the loan term. This option works well for those with fluctuating incomes or those confident in their ability to manage finances strategically.
Split Mortgages
A split mortgage combines the benefits of fixed and variable-rate loans. For example, part of your loan might have a fixed rate for predictability, while the other part has a variable rate for flexibility. This allows borrowers to balance stability and adaptability based on their financial goals.
Split mortgages are ideal for borrowers who want to hedge against interest rate changes while still having the flexibility to make lump sum payments. It’s a versatile solution for those looking for a tailored approach to their mortgage.
Frequently Asked Questions
Q1. What is the difference between a fixed-rate mortgage and a variable-rate mortgage?
A1. A fixed-rate mortgage offers consistent month-on-month payments, while a variable-rate mortgage adjusts based on market conditions, providing flexibility but more uncertainty.
Q2. How do I choose the right mortgage for my situation?
A2. Consider factors like your financial stability, long-term goals, and tolerance for interest rate fluctuations. Our financial mortgage advisors at TAG can help assess your options and guide you on your mortgage loan journey.
Q3. What is the benefit of an offset mortgage?
A3. Offset mortgages reduce the interest you pay by linking your savings account to your loan balance, helping you save money over time.
Q4. Can I make lump sum repayments on my mortgage?
A4. With variable or flexible loans, you can often make lump sum payments without penalties, reducing your overall interest costs.
Q5. How do I compare mortgage interest rates and terms from different lenders?
A5. Work with a knowledgeable mortgage adviser like our team at TAG, who can provide insights into the mortgage market and negotiate with multiple lenders to find the best deal.
Understanding the different mortgage types is key to making informed decisions about your home loan. Whether you’re seeking stability with a fixed rate, flexibility with a revolving credit facility, or a tailored approach with a split loan, the right choice will always depend on your financial situation and goals.
At The Advice Group, our experts simplify the mortgage process and help you choose the most suitable option for your needs. Contact us today and chat with one of our team to discuss your mortgage options and take the first step (or second…or third..) toward achieving your property goals.