Mortgage terms and definitions:

Here are some common terms and definitions used to define mortgage types and processes. As your mortgage adviser we will be able to go into theses in more detail with you in relation to your circumstances and goals.

Fixed Interest Rate:
During the time period chosen, say 24 months, the interest rate will not change even if market rates go up or down. The advantage is the security you have of knowing what your mortgage payments will be each month. Downside is that you are in a fixed price and restricted to how much extra you can pay back into your mortgage, there are also costs to break the fixed rate; and it also takes longer to repay the mortgage. You could also end up paying a higher rate if the market rates drop during the fixed term.

Floating Interest Rate:
Your mortgage's rate will move with the times and market forces. The big plus is because you are not at a fixed price, you have more flexibility and you are not restricted in making extra repayments into your mortgage. Typically, there are no penalties for making extra repayments unlike a fixed rate, so you can reduce your debt faster. The downside is, if the market rate goes up, so does yours, which can make budgeting difficult.

Capped Interest Rates:
A capped rate can not go higher than what has been agreed to over a set period, such as 1 year. If market rates go downwards, your rate will follow, if they go up, they won't go higher than the agreed level. Upside is you have the advantage of flexibility and a level of certainty. Downside, a lack of rapid interest rate rises makes the cost of the facility not worth while, and you may not be offered it again.

Loan Term:
The lengths of time it will take pay your mortgage off. This can be anything from 5 years to 30 years depending on the nature and circumstances of the lending. Lenders use loan terms to determine the affordability of the loan to the borrower. With mortgage reduction strategies, the loan term will be dictated by you.

Principal and Interest:
This is the repaying of the actual (principle) loan amount and the interest cost/charges incurred. Over time, you are reducing your loan balance to zero, as you are paying both the principle and interest incurred.

Interest Only:
For a nominated period you repay only the interest incurred on the loan, and not the principle. The advantage is that you pay slightly less per month, so can be a good option if it is for your first home initially, and to a limited extent, for property investment. Big downside, because you are not paying principle, you are not reducing your debt and could be looking at a higher mortgage repayment bill later on, or a low increase in the value of your property, leaving owing more than the property's worth.

Split Loan:
Split loans are a combination of fixed and floating interest facilities, allow you to take advantage of all options, and help you to budget in periods of rapid interest rate change. By having mortgage splits, you can tailor a mortgage package to your needs and goals. Your mortgage adviser can help you create the right structure for you.

Table Loan:
Your repayment amount will stay the same over the term of the loan and initially you are paying more interest than principle. Ultimately your interest portion decreases and principle portion increases hence heading to zero balance. It is easier to budget as payments stay the same, except if there are any rate changes. A table loan also looks the most affordable for most borrowers. However keeping on this path will mean your loan will take 30 years to pay off.

Reducing Loan:
The principle amount you repay remains the same through the term of the loan. The amount of principle reduces with each payment and ultimately so does the interest you pay. However, if you are not able to make higher payments initially than say you would in a Table Loan, this option may not be for you.

Revolving Credit Facility:
This facility is a line of credit that allows you to have a mortgage reduction strategy, and have access to funds without going through a loan application process. Operate on a floating rate which means extra repayments at no cost, and interest is charged monthly against the actual principle owed, which can make it cheaper long term than a Table Loan. Downside, if rates go up, so does yours, and the line of credit can be a big temptation to get that car or boat you have always wanted! Works well in combination with fixed facilities to alleviate any price increases, although discipline is the key word.

Transaction Loan with Reducing Limit:
Similar to Revolving Credit, however the credit limit decreases over time, removing temptation and making it easier to control! You do get easy access to money if required, and you still have flexibility to make extra repayments at no penalty. Directing your income into this facility keeps the principle down and therefore reduces the interest you pay, hence saving money in the long run. Like Revolving Credit, you are vulnerable to Interest Rate changes, however by paying extra when rates are low, or using a mortgage split, you can help cover yourself.

Construction Loan:
Basically a facility used to build a property. Typically operate on floating facility, and funds are drawn down as the builder needs them, not all at once up front. Generally, borrowers make interest only repayments on the amount that has been drawn down, and once the property is completed, the remaining debt switches over to standard home loan.

Bridging Loan:
This allows someone to purchase a property prior to selling their own. The lender is funding the purchase of the new home, and when the old home sells, the debt is repaid. Typically the facility has a term of 6 - 12 months and is charged at higher interest rates which can sometimes be capitalised. Convenient but very expensive, and very tricky, the borrower needs to be clear on what they are getting into. In some circumstances, a bridging loan can be used to finance out of a mortgagee sale and allow time for an orderly sale, however high pricing and high risk applies.


Colin Leader NZIM Dip Man
Mortgage Adviser
Financial Independence Ltd

P 07 578 4414 ext 707 | 0800 694 672
F 07 578 4814
M 027 2535 069
E e-mail Colin
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