Repayment Structure – what is this?
Table Loan
Revolving Credit Loan
Offset Loan
Reducing Loan
Interest Only Loan
Are you curious as to how you can make your money work for you a bit better? Do you want to be able to pay down your home loan a little faster than your neighbours or friends?
Did you know that there is more than one way to structure a home loan? One of these structures below might suit your situation better than your standard home loan, this is where the team at Mortgage Sure can help you. We can talk you through one of these options and help you choose the best-structured home loan for you. When we talk about structuring a home loan we are talking about the repayment structure. This is different to interest rates and the interest rates will have an impact on the amount that you repay. All these home loans differ in their repayment structure, rates and flexibility. Each of these aspects has an impact on how much the loan costs and how long it takes to pay it off. Each loan structure has its advantages and disadvantages, so let us spend some time breaking them down:
Table Loan: This is the most common type of loan, with most banks/lenders you can choose a 30-year term and a fixed or floating interest rate. Usually, the first few years of payments pay off the interest and in the later years of the term, you will be paying off the principal (the amount of the loan itself). There are often application fees when taking out a table loan, however, these are often negotiable and your mortgage broker can negotiate this in your favour most of the time. A table loan offers the security of regular payments and an end date to pay off the loan, if you choose to fix your loan it can offer more security, by knowing how much your repayments will be. This however can be a disadvantage if you have an irregular income.
Pros: Table loans offer security when you have a stable income.
Cons: Table loans can be quite rigid when you have a more flexible income.
Revolving Credit Loan: The easiest way to describe this type of loan is like a giant overdraft. When structuring your loan in this manner your pay will go straight into this account and your bills will come out of this account as well when they are due. If you can keep the loan as low as possible, you can sometimes pay less interest as the interest rates are calculated daily. A revolving credit loan can allow you to make lump sum repayments and also redraw back up to your limit. Some revolving credit facilities will gradually reduce the loan limit to help you pay it off. A revolving credit loan is that you can pay off your loan faster if you are well organised, if you have an uneven income this type of loan can be of benefit as there are no fixed payments. Also if you have surplus funds then you can put them into this credit facility, this can give you bigger interest savings, this also avoids paying tax on the interest earned from a savings account. If you are not disciplined with your money you may always end up living close to drawing the full amount which would not allow you to pay off your loan any faster and may result in your over drawing which means more fees.
Pros: You only have one account for everything. You can keep the loan as low as you can and pay less interest.
Cons: Overspending is easy, which would result in a longer time to pay off the loan.
Interest-only Loan: With this loan, as the name suggests you only pay interest on the loan, not the principal. So your payments are lower. Some people will take an interest-only ‘holiday – this is a short period of 1 or 2 years where they only pay interest on their loan, and once this is upmost people return to a table loan. The main advantage here is that you are paying less, therefore, you have more money for other things. However, an interest-only loan is usually for a short time, you will have to start paying off the principal of your loan once the interest-only term comes to an end.
Pros: You can have more money in the short term.
Cons: The principal of your home loan isn’t shifting. Your payments will increase as soon as the interest only finishes.
There are another couple of loan types – however, these are not common in New Zealand and often work on an offset basis – by offsetting some of your mortgage against a large amount of savings that you might have. If you are interested in talking about one of the loans or offsetting some of your mortgage against savings then reach out – we are here to help make your home loan work for you.
If you want to make your home loan work for you, then give us a call. We love helping our clients make their money work for them.
While we’re home loan experts, our blog posts are for general information purposes only and are not intended as financial advice. If at any stage you need personalised advice, get in touch on 06 8788 4444 or Ben or Mark.