Repayment Structures: What Kind of Loan is Best for you?

Nowadays, mortgages come in all shapes and sizes in New Zealand. However, there are certain features of a mortgage that remain the same across all types of mortgage schemes. Every mortgage rate will be associated with a particular kind of interest rate, a fixed or variable fee to be paid off in monthly, or quarterly installments and a flexibility component. The flexibility component of a mortgage or home loan will depend on the kind of repayment structure that one chooses right at the outset. In this article, we take a closer look at the various repayment structures that lenders in New Zealand typically offer.

Fixed and floating rates

Before we discuss the repayment structures, it is important to acknowledge the two different kinds of interest rates available on mortgages. The first of these is the fixed interest rate. As the name itself implies, a fixed interest rate, whether it is over a period of 5 years or just a handful of months, is one that does not change regardless of market conditions. The main advantage of a fixed interest rate is that you will be able to immediately calculate how much money you will have to repay over a particular period of time. However, the drawback of a fixed rate of interest is that floating rates may drop below these rates during your term of repayment.

The second kind of interest rate is the floating rate. As the market environment changes, lenders will collectively change the market interest rate, based on the Official Cash Rate or OCR. The advantage of this is that the individual is afforded greater freedom in paying off the loan, without suffering any payment charges. However, since these rates are variable, there is also a possibility that these rates may rise significantly depending on the wider market scenario.

Table loans

When it comes to your repayment structure, there are typically four kinds of loans. The first is the common table loan. Table loans can be secured on both fixed or floating rates, and can have repayment periods that span over decades. Typically with a table loan, individuals need to pay off the interest amounts on the loan before beginning to pay the principal amount slowly. These are ideal for individuals who are guaranteed a steady flow of income over their repayment terms.
Revolving credit

The second kind of loan is the revolving credit loan. These kinds of loans function just like a bank overdraft. A portion of one’s income is automatically transferred each month to a bank account, and is used to pay off any bills relevant to the loan. Interest on these loans is calculated on a daily basis, so it is always wise to keep the loan amount as small as possible at any point in time. Since there are no strict fixed repayments, these are better suited to individuals who have income discrepancies. Over time, lenders will reduce the credit limits to ensure that the entire loan amount is eventually paid off.

Reducing loan

The third kind of loan is the reducing loan. These are simple to understand in that individuals will need to pay off the principal loan amount on a monthly basis, but the interest on this principal gets reduced as time passes. Payments on these kinds of loans will naturally be high at the outset, but then fall gradually over time. As such, these loans are ideal for individuals who have large cash reserves currently, but expect their incomes to dwindle over time.

Interest only

Finally, the fourth kind of loan is the interest only loan. As the name implies, borrowers will only be required to pay the interest accrued on the principal amounts of their loans. These kinds of loans are temporary since eventually one will need to switch to a table loan, or another alternative, when it comes down to paying off the principal. These loans are ideal for individuals who need higher levels of income in the short term.