When it come to choosing a mortgage structure your decision could save you significant interest costs. The structure should be tailored to suit your specific situation, giving you the flexibility and benefits of each type of loan. If you have any questions, speak to us about helping you choose the best mortgage structure for your situation.

Table Mortgage

This is the most commonly used loan structure in New Zealand. The repayments are calculated and agreed on at the start and can vary based on the interest rates. This structure should in theory stay the same throughout the loan (this is where the name comes from), but in reality, interest rates vary and will change the repayment amount. The loan is paid off through a process called amortization. This is where the principal of the loan is paid off over regular installments. The repayments in a typical table mortgage will be split between principal and interest. At first, the repayment will have a much larger interest portion compared to the principal, but over time, the principal portion will increase until the loan is completely paid off. This can be seen in the figure bellow:

A table loan can give some security to the borrower allowing them to have more consistent repayments spread over the term of the loan. This does however come at a cost if you do not take advantage of making extra repayments or reducing your term.


Reducing Mortgage

With a reducing mortgage, the same principal is paid throughout the loan an the interest portion is charged on the remaining balance. This means that the repayments will start off very high, and reduce over time.

These are best suited to someone with the ability to make higher repayments at the start. Typically, you could pay less interest on a structure like this if you have the ability to make the repayments. A reducing loan is rarely used anymore as there is enough flexibility in a table loan that allows you to get the same benefits.


Revolving Credit

A revolving credit is effectively an overdraft facility secured over your house. A part of the loan is partitioned to allow for easy withdrawal or contribution. This partition is usually charged a variable interest rate based on the balance withdrawn. For example, if you have a $50,000 revolving credit facility and withdraw $10,000, you will only need to pay interest on $10,000. There are often options to put a repayment schedule in place to ensure that the withdrawn amount is paid off. In some cases, this facility will incur a monthly fee.

A revolving credit facility is great as it adds some flexibility to your loan, allowing you to pay down your mortgage faster with lump sums or inconsistent payments. There is also the benefit of timing your income and expenses correctly to ensure that your money is held in the revolving credit facility saving you interest. It does however add some risk. If you are not disciplined enough, having such easy access to this finance can just put you further into debt.


Interest Only

In an interest only loan, no principal is required until the agreed date. These loans have a shorter term and typically last for two to five years.

The benefit of this loan is that it gives borrowers the ability to make a purchase without using their own finances. When cash is tied up in another investment or there is a delay between the sale of another asset, this type of loan can prove useful. Repayments are also smaller than a standard principal and interest loan so this structure can be a short-term solution for someone that is expecting a change in their current living situation. At the end of the interest only period, the loan will convert into a fully amortized loan and borrows will need to be able to make repayments on the principal and interest of the loan.

If you have any questions about which of these would best suit your situation, contact us and we will be happy to help. Or try out our calculators to see how these types of loans work with different loan amounts and interest rates.


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