Compare Mortgage Options - The Definitive Guide for New Zealand Homeowners

Our guide compares Table Home Loans, Reducing Balance Home Loans, Offset Mortgages, Revolving Credit Mortgages and Interest-Only Mortgages

Updated 6 January 2021
New Zealand banks offer up to five types of mortgage choices, each with a specific interest rate, repayment term and fee schedule. These factors influence the total cost of a mortgage. Our view is that while a standard 25 year fixed repayment mortgage is suitable for many first home buyers, there are more suitable options for those in unique situations.

In this guide, we outline the five mortgage types, their pros, cons and essential considerations. We also list some frequently asked questions to help you make the right choice when it comes to re-mortgaging or applying for a  first home loan. Our guide covers:
Know this first: Early Repayments
  • Generally, a fixed interest rate mortgage doesn't let you make overpayments (i.e. payment beyond what you've agreed in your repayment schedule) without charging a penalty. Some banks have a limit, such as the ASB which allows its customers to increase their fixed interest rate loan repayments by up to $500 per fortnight or $1,000 per month. However, anything over this will incur an early repayment charge. 
  • With a floating interest rate mortgage, there is no such early repayment charge, meaning the amount you can overpay is as little or as much as you wish.

The Five ​Types of Home Loans

Our view is simple - the best home loan type is the one that's the most affordable and cost-effective. While most home owners will choose a Table Home Loan, it's not for everyone. Every New Zealander has a unique personal financial situation so it's important to consider all the options before agreeing to a mortgage. To help you, we suggesting contacting a mortgage broker to evaluate your options. 

Our list below outlines table home loans (the most common mortgage type), reducing balance home loans (relatively uncommon, but offered by speciality lenders), revolving credit mortgages, offset mortgages, and interest-only mortgages. ​Please note, we have excluded reverse mortgages as they are a specific retirement-focused product and not relevant to most current and future homeowners.

Table Home Loans

How Table Home Loans Work:
This is the loan most people choose; it has a regular repayment structure and terms of up to 25 or 30 years. You make principal and interest payments regularly (monthly, fortnightly, or weekly). Your initial payments cover mostly interest. As you pay the balance down, your interest charges decrease, and you pay more toward the principal balance. This is best seen visually in our loan amortisation calculator (table mortgages are structured so that you make fixed payments, and at the beginning you're paying mostly interest). 

Pros 
  • You know when your loan will be paid off (and you must follow a strict payment schedule to keep you on track).
  • You can budget your payments better, especially if you choose a fixed interest rate.

Cons
  • If you have an irregular income, it could be hard to keep up with the strict payments.
  • You may be charged for over-payments and early repayments. If you want to overpay your mortgage, check the terms and conditions before signing up.

What to Consider
  • You must decide if you want a fixed or floating interest rate. If you choose a fixed rate, you may not be able to make extra payments or raise your repayments.
  • Before you decide, determine your term (25 years is most common but not required), and think about how much flexibility you want.
  • If you feel better having a fixed payment for five years, for example, then a fixed rate is right for you. Look at your options (our best home loans has the latest offers) and think what's best for you long-term. 

Most suitable for:
  • First home buyers (In most cases)
  • Households with stable incomes re-mortgaging
  • Qualifying property investors

More Information:

​Reducing Balance Home Loans

How Reducing Balance Home Loans Work:

Reducing balance home loans aren’t very common today, but some banks still offer them. Unlike a table loan, where you make a fixed payment every month, a reducing loan requires a fixed principal payment for the entire term, and the diminished principal will in turn generate less interest charges. As you pay the balance down, your interest charges decrease, as does your overall repayment. 

 Pros  
  • You pay off more principal each month than you would on a table loan
  • Works well for borrowers who will have decreasing income in future years
  • You pay less interest over the life of the loan because you make more payments towards the principal 
 
Cons
  • Reducing loans have high initial payments because of the larger principal fixed payment plus interest on the full amount, which can be hard to afford

What to Consider
  • A reducing loan is the most expensive loan option and makes sense for very few borrowers.​

Most suitable for:
  • ​Buyers in their 50s or 60s on high salaries looking to purchase a new property

Revolving Credit Home Loans

How Revolving Credit Home Loans Work:
​If you have equity in your home, you may tap into it with the Revolving Credit Mortgage ("RCM"). This revolving account works much like an overdraft:
  1. You get access to your home’s equity (i.e. the money you've repaid on your mortgage) and can spend it how you want.
  2. The RCM becomes your ‘everyday account’ or the account you pay your bills with, use for daily spending, and even deposit your salary or wages into, rather than your bank account.
  3. A revolving credit loan is a line of credit. You pay interest only on the funds you withdraw. If you also have your wages deposited into your revolving credit loan, it offsets the amount you have outstanding, which minimizes your interest costs as interest accrues daily.
  4. You can repay as much (or as little) as you want each month and draw up to your credit line. It works to your advantage to keep as much  as possible of your pay in the account to minimize interest costs. 

Pros
  • A great option for people with variable income as there is no required monthly payment (but you should always make at least one repayment per month to keep on top of the debt)
  • If you time it right with your income and repayments, you could pay the loan off faster by offsetting the interest costs
  • You can make lump sum repayments at any time, but you also have the option to redraw the funds if you need them down the road
Cons
  • It takes incredible discipline to use a revolving credit line, as your goal is to pay off the mortgage quickly, but with a credit line available, it could be tempting to spend it

What to Consider
  • Look out for various fees. Some banks charge for regular banking transactions from the account, and others charge an application fee. Look at the bottom line to see what a loan could cost you in total so you can make an informed decision.
  • Only choose a revolving credit loan if you are exceptionally disciplined in your efforts to pay off your loan and not overspend. ​The 2008 global financial crisis was started by people borrowing against their home and then failing to repay - a difficult situation can go from bad to worse very quickly.

Most suitable for:
  • Anyone who wants to borrow to buy a high-ticket item can 'tap the equity' in their home by borrowing against the house using a revolving credit mortgage.
  • Business owners with varying income and the self-employed also find revolving credit mortgages beneficial to their cashflow situation.
  • If you have purchased a home with a partner and have separate finances, a revolving credit facility offers repayment flexibility.

More Information:

Offset Mortgages

How Offset Mortgages Work:
An offset mortgage links your mortgage to your everyday cash savings account (held with the same bank as the mortgage). The total sum of your savings is deducted from your mortgage balance, which reduces your monthly interest costs and repayments.

An offset mortgage doesn’t affect the value of your savings. Instead, your savings are deposited with the bank with which you have the mortgage, and their value is ‘offset’ against your mortgage balance. For example, if you have a $500,000 mortgage and $20,000 in cash savings, you’ll only pay interest on $480,000. You won’t earn interest on the cash savings as you usually would while it’s part of the offset mortgage.

Pros:
  1. Control over your monthly mortgage cost – while the principal repayment stays the same, the interest component will fall if you add more to your savings accounts.
  2. You are likely to save money - mortgage interest rates are, in most cases, higher than savings interest rates. You forgo interest income but save more overall, which can help pay off the mortgage faster.
  3. You have full access to your savings – this means your personal financial situation is flexible.
  4. You can make overpayments without penalty – because offset mortgages have floating interest rates, you can repay your mortgage as often as you like without being charged early repayment fees. Fixed-term mortgages don’t allow this.

​Cons: 
  1. Higher interest rates – you’re likely to be offered an interest rate above the current 2-year and 5-year home loan deals.
  2. You won't earn interest on the savings in your offset mortgage account

What to Consider
  • Be aware that the interest rate is floating, not fixed – the interest rate you pay will move if the Reserve Bank of New Zealand moves interest rates. This means your monthly mortgage cost could go up or down.
  • Offset mortgages will appeal to anyone who likes flexibility and is saving as they repay a mortgage.
  • The interest rate is, in most cases, well above the base rate offered by standard table loans. This will make month on month repayment more expensive. 

Most suitable for:
  • Parents helping their children with their first home (they avoid having to lend or invest a deposit; the amount offered simply sits in their bank account and earns 0% interest).
  • People who would like to have access to their savings when they are foreseeing the possibility of a big expense.

More information:

Interest-Only Home Loans

How Interest-Only Home Loans Work:
In an interest only loan, your contributions at the start of the loan don't diminish the principal, they only cover the interest owed on the amount you borrowed. This makes for an attractive option because your mortgage payments would be lower since you are only paying for the interest part of the loan. However, an interest-only loan takes longer to repay overall as the principal remains unaffected so you will need to re-mortgage later on to a table loan and/or find other sources of money to repay the balance owed.
​
You and the bank agree upon the term in which you will repay interest only. This means you only cover the bank charges and don’t pay down your principal balance. This goes on for a predetermined amount of time. Banks require an initial deposit, and if the interest rate is floating (which is typical), there are no fees for early repayment.

Once the period ends, you have two choices – refinance into a table loan or pay the principal balance in one lump sum. Most people convert to a table loan, except for property investors who sell the home and pay off the loan.

Pros
  • Lower payments mean more cash flow which works well if you’re trying to make home improvements or need a lower payment initially
  • It may be a good option for homeowners looking to sell soon and who need to fix the home up first

Cons
  • Your interest charges never drop because you don’t pay the principal balance down and if you keep the home, you’re on the hook for a large lump sum payment at the end of the term.

What to Consider
  • ​Interest-only loans usually aren’t a great idea unless you know beyond a reasonable doubt that you’ll sell the home in the next couple of years and need the ‘freed up cash’ to cover renovations or repairs.
  • Dealing with a lump sum amount due is a scary proposition unless you know you’re in a strong position to secure a table loan upon maturity. ​

Most suitable for: 
  • ​Property investors, as they favour interest-only mortgages when house prices are rising year after year. 

More information:

Fixed vs Floating Interest Rates - Choosing the Right Option for Your Mortgage

The majority of homeowners will choose a fixed interest rate for certainty, but an increasing number of homeowners are considering floating rates given the recent drop in interest rates. What's right for you is likely to be what's most affordable. For example, there's no benefit to taking on a fixed interest rate for five years if you believe you will make early repayments.

Before making a decision, evaluate your finances for the next two to five years. If you want a fixed repayment amount, then a fixed interest rate is likely to be the most suitable. However, those wanting to overpay their mortgage month after month may wish to consider floating options and/or a bank that offers a generous fee-free early repayment allowance.

Option 1 - Fixed Interest Rate

Fixed rates lock in a specific rate for one to five years. You know your rate for the specified term and can budget accordingly. 

How it Works
  • You lock in a rate for the specified term – usually one to five years. When the term expires, you can choose another fixed interest rate loan or a variable rate loan if you feel it’s a better fit. 

Pros
  • You always know your payments (at least for the specified term). This makes it easier to budget.
  • You can lock in an interest rate you feel most comfortable with, and not have to worry about adjustments.
  • You don’t have to worry about unexpected payment increases.

Cons
  • You cannot make lump sum or early repayments without paying a penalty. 
  • You don’t get to take advantage of falling rates (if applicable).

Option 2 - Floating Rate

A floating rate changes with the market. It can increase or decrease at any given moment, which means you never know your true interest rate because it fluctuates.

How it Works
  • Most banks tie the floating rate to the Official Cash Rate. When it increases, so does your mortgage rate, but when it decreases your payment falls. Your bank must notify you of the new rate anytime it changes, and it must inform you of the new repayment amount.

Pros  
  • You can take advantage of falling rates and save money on your payments.
  • You are free to make lump sum or extra repayments at any time​
 
Cons
  • The unpredictability can be too much for some people to handle and if rates get too high, it can make your payment unaffordable. ​

Mortgage Types - Frequently Asked Questions

Selecting the right mortgage takes time if you want to ensure you make the right decision. Our frequently asked questions help anticipate what's most important. 

​Can you split your interest rate between fixed and floating rates?

Yes, most banks allow you to split your mortgage into two portions – one with a fixed rate and one with a floating rate. You can make extra repayments on the floating portion, but not on the fixed rate portion.

​Should borrowers with irregular income choose a table loan?

Table loans are the most predictable option, but also the hardest for borrowers with unpredictable income. If you aren’t sure if you can comfortably afford the payment no matter your income, it may not be the best option.

​Do you earn interest credit on your savings tied to Offset Loans?

No, any accounts you link to your offset loan do not earn interest from the bank that holds it. Instead, you save on the interest you would have paid on that amount of your mortgage. Overall, it's likely you'll save more - mortgage interest rates are often much greater than the bank account savings rates (i.e. 3.59% mortgage rates vs a 1.50% bank interest rate).
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