Mortgage repayment options
A mortgage is essentially an obligation to repay a debt, with the property purchased being the collateral or security on which the loan is obtained. Mortgages are either interest-only, principal and interest, with either fixed or variable interest rate options
Floating versus Fixed
Your mortgage interest rate may be fixed, floating, or a combination of both. The floating rate is based on the OCR (official cash rate) set by the Reserve Bank of New Zealand. Fixed rates are funded by overseas banks (predominantely the US). In New Zealand 5 years is typically the longest you can fix a mortgage for.
FoxPlan Tip
Ask your FoxPlan/New Zealand Home Loan (NZHL) adviser about strategies for repaying your Mortgage faster by using interest and term strategies.
Paying Off your Mortgage (Principal & Interest)
Whenever you make payments on your mortgage a portion of it goes on to:
a. Paying the bank first i.e. their interest, and
b. Whats left over pays off the debt i.e. your principal.
After paying off the interest first, often there is not much left over, and this is why it takes quite some time for the debt to go down.
So the faster you can reduce your principal the more you will save. The standard term for a Mortgage is 30 years, but can be lower.
FoxPlan Tip
If you accumulate lump sums of capital it is a good idea to put the majority of it onto your Mortgage. The drop in principal will save you interest, which could add up to a lot of money over the life of the loan.
Interest Only Mortgage
You pay the bank their interest only, no debt (i.e. principal) is repaid.
Circumstances may dictate an interest only mortgage as being the most appropriate short, medium or long term option. Residential property investors often grow a portfolio of properties based on the non repayment of capital. In other circumstances cash flow may determine your Financial Adviser making a recommendation to have a period of interest only on a mortgage for home owners or home renovators. Lenders need to approve Interest Only and only approve for short duration. In cases when the LVR exceeds 80% it is unlikely the bank will offer an Interest Only option.