As first home buyers, it can be difficult to understand the different types of home loans (mortgages) and how they work, never mind deciding which type of home loan is right for you! Some home loans are best for borrowers looking for flexibility, others are more suited to those requiring certainty. In this home loan basics for first home buyers’ guide, we’ll take a look at six types of home loans available in New Zealand, and outline some of the pros and cons of each.
1. Table Loan
The most common type of mortgage is a Table Loan where repayments stay the same each week, fortnight or month, unless the interest rate changes. With each repayment, a portion of the interest and principal loan are repaid. At the beginning of the loan repayment period, a larger proportion goes into paying the interest owing. But, as the principal is paid down and the interest reduces, more of the repayment goes into paying the principal.
Pros:
- A straightforward home loan
- Ideal for borrowers who need certainty
Cons:
- Won’t suit borrowers with irregular income
- Doesn’t motivate borrowers to pay back their mortgage faster
2. Reducing Loan
Reducing Loans – while not that common New Zealand - work similarly to a Table Loan but the principal repayments start higher and remain the same as the interest portion reduces over time.
Pros:
- Because the principal is paid off faster, the overall cost of the loan is lower
Cons:
- The initial repayments will likely be higher than the repayments on a Table Loan
3. Revolving Credit Loan
A Revolving Credit Loan works much like a bank account with a large overdraft. Earnings are paid into the account, reducing the overall mortgage by a larger amount than a minimum repayment would. Interest on the outstanding balance is calculated daily.
Pros:
- Because there are no fixed repayments, this type of loan may suit borrowers with irregular income
- Borrowers can make lump sum repayments - and withdraw up to their credit limit – which could help them pay back the mortgage faster
Cons:
- It’s a risky loan option for borrowers who are not financially disciplined
4. Offset Mortgage
An Offset Mortgage is linked to a savings or everyday bank account. Money paid into the savings account is offset against the amount owing for the mortgage, reducing the interest charged on the loan. The more money held in the savings or everyday bank account the less interest borrowers pay.
Pros:
- Most savings accounts earn very low interest, so offsetting savings against the home loan effectively means it’s earning the same interest rate as the mortgage
- Borrowers pay less interest and may be able to pay back their loan faster
Cons:
- Savings in the linked savings account do not earn interest
- Only variable interest rates are available with this loan type which may not be the best option in a rising interest rate market
5. Interest Only Loan
With this type of loan, repayments only cover the interest charges and the principal amount is not reduced. To pay off an interest only loan, the borrower would sell the property, re-mortgage to another type of loan, or pay back the loan using some other form of income, such as an inheritance.
Pros:
- Lower repayments so more money in the budget to use for other things
- Best suited to investors on-selling properties with interest only for a short time
Cons:
- Interest charges don’t reduce over time as the principal amount stays the same
6. Combination Home Loan
Most lenders offer the ability to mix and match home loan types. So borrowers could have a portion of their home loan on revolving credit, some on a fixed term home loan and the rest on a floating interest rate home loan. Structuring the mortgage like this allows borrowers to make extra repayments, pay down their loan faster, while still having some certainty around how much repayments will be.
With so many options to choose from, and so many types of home loans, it makes sense to get professional mortgage advice when deciding how best to structure your home loan. For mortgage advice that is designed around your unique financial situation and circumstances, contact a Mortgage Express branded mortgage adviser today.
