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What types of home loan structures are there and what are the pros and cons of each?

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Many kiwis are currently in the process of refinancing their home loans. With interest rates still on the rise, you may be wondering if your current home loan is still right for you. Learn about the different types of home loans you can apply for whether you’re looking for more flexibility, more certainty or a mixture of both.  

Table Loans 

By far the most common type of home loan, table loans involve structuring the term of the loan over a long period (up to 30 years with most lenders). Every week, fortnight, or month, you repay the same amount unless your interest rate changes. In the beginning, you are mostly paying off the interest. As you go on you begin paying more of the principal, which is the amount you initially borrowed. Table loans can be structured with either a fixed or a floating rate. 

The pros: 

  • Certainty – you pay regular payments and you have a set date for when it will be paid off. 
  • This loan provides the discipline of regular payments and a set date as to when it will be paid off. 

 The cons: 

  • If your income is irregular, making fixed regular payments may be difficult. 


Offset Loans 

In most situations, interest is paid on the full amount of your loan. If you choose an offset loan set-up, the lender takes into account any savings or funds you may have in other accounts and deducts this from the loan total before calculating your interest. For example, if you have a $500,000 home loan and $25,000 in your savings account, you will only pay interest on $475,000. The interest is calculated daily, so the more money you have in your accounts the less interest you pay. Interest is calculated at the floating (or variable) rate. 

The pros: 

  • Paying less interest means you can pay off your loan faster. 
  • You have flexibility as there is usually no fixed term. 
  • It is often possible to link many different accounts (partners, parents, etc) to generate more savings on interest. 

 The cons: 

  • Any savings that are offset will no longer earn interest. (However, interest earned on savings is usually much lower than the interest paid on debt, so the offset will likely be worthwhile). 

Revolving Credit Loans 

Having a revolving credit loan is like having a really large overdraft. You have the one account that your pay goes into and your bills and loan repayments are deducted from this same account. The interest you pay is calculated daily based on the balance of your account. So the more money you have in the account the less interest you pay. You can make lump-sum repayments and redraw money up to the loan amount limit. 

The pros: 

  • If you are disciplined, you can pay off your mortgage faster. 
  • Adding any savings into this account (rather than a separate savings account) gives you bigger interest saves and avoids the tax on savings account interest. 
  • There are no fixed repayments, which can be good if your income fluctuates. 
  • Some lenders can reduce your credit limit each month, which can help you pay off your loan within a specific term. 

 The cons: 

  • You need to have self-control and avoid the temptation to spend up to the credit limit – as this will keep you in debt for longer. 
  • Application fees can be up to $500 and you may also be charged fees for day-to-day transactions. 


Interest-Only Loans 

As the name suggests, this is when repayments cover just the interest calculated on the loan. You are not repaying any of the principal, therefore you are not reducing the loan at all. Many use this interest-only option for a short period when they need additional cashflow and then switch to a table loan. 

The pros: 

  • Repayments are lower, so you will have more cash for other things. 

The cons: 

  • It ends up costing you more as your repayments are not actually making any dent in the loan amount. 

Interest Rates – Floating, fixed or a mix?

Floating Rates 

Floating home loans are sometimes known as variable rate home loans. If you have a floating home loan your interest rate will fluctuate so your repayments will go up or down. The amount it fluctuates is driven by the Official Cash Rate. 

The pros: 

  • You can make additional payments without any penalties. 
  • You have the flexibility to move to a fixed-term loan as you please. 
  • You can more easily absorb more expensive debt into your floating home loan. 

The cons: 

  • Floating rates are usually higher than fixed rates. 
  • When rates go up so do your payments, which can put pressure on your cashflow. 


Fixed Rates 

With a fixed home loan, you pay an interest rate that is locked in for a specific period. This period could be anything between six months and five years and is called the loan term. At the end of the term, you need to re-fix it for a new term or move to a floating rate. 

The pros: 

  • Certainty – repayments are always the same amount. 
  • Lenders are competitive and you can often negotiate rates. 
  • You can secure a low rate for a long period, which is good if rates are rising. 

 The cons: 

  • If you lock in for a long term, there’s a chance rates may drop. 
  • Some lenders offer capped rates, where the interest rate cannot rise above your fixed rate, but it will drop if floating rates drop below the capped rate. 
  • If you want to increase repayments or make extra payments, there can be additional charges. 
  • If you want to break your term, you may be charged a ‘break fee’. 


A Mixture of Fixed and Floating 

You can split a loan between fixed and floating rates. This lets you make extra repayments without charge on the floating rate portion. 

Splitting a loan can give you a balance between the certainty of a fixed rate and the flexibility of a floating rate.  

If you’ve got a mortgage and are unsure which loan or combination of loans is the best for your situation, we can have a look at it and can potentially structure it differently so you can feel confident that your mortgage is working the best it can for you, and not the other way around.  

Keep in mind this article is providing general information and not individual financial advice.