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Back to Basics: Mortgages 101

Spike

Whether you own a home or just wish you did, you should probably know what a mortgage is and how it works.

You’ve probably heard of fixed interest rates, market value and yadda yadda, but the main thing you need to know about mortgages is that it’s a long term commitment. Like loooong term (unless you happen to be flush with cash!).

Without going into too much head-spinning detail (that’s what a mortgage broker’s for, right?), here are a few things you should know about mortgages.

There are four basic types of mortgages:

A table mortgage – this one is super popular because your regular payments are the same each time – nobody likes that surprise bill! Most of the money goes towards paying the interest at first, but as your loan goes down, more of each payment goes to the principal (what you actually borrowed to pay for the house).

A revolving credit mortgage – the name sounds a bit technical but a revolving credit facility mortgage is just like a giant overdraft. Your pay goes straight into the account and bills are paid out when they’re due. If you keep the loan low, you pay less interest because that’s calculated daily. We wouldn’t recommend this if you’re a bit of a splurger because you can be tempted to always spend up to the pretty big credit limit!

A reducing mortgage – with this one, you start by paying off both the interest and the principal, and the amount of interest you pay goes down each time. So your payments start pretty high but then go down over time. These aren’t too common in New Zealand though.

Interest-only mortgage – you guessed it, with this mortgage, you only pay off the interest. This means your payments are nice and low, but it also means it’ll cost more overall because you still have to pay off the main part of the loan too!

Still with us? Cool, ‘cause you also need to know about the different types of interest!

So because the bank is letting you have this huge loan and not pay it back straightaway, they obviously need to get something out of it. This is where interest comes in.

These are the different interest types:

Floating interest rate – it’s called floating because it goes up and down. Depending on how the market’s feeling, this rate can change and make your payments higher or lower if you’re on this rate. Which is cool if it’s low, not so cool if it’s high.

Fixed interest rate –  this means that whatever rate is available at the moment is locked in for you. So if the rates go up, you’re covered. If they go down, you’ll be a bit gutted but at least your payments are stable.

Capped ratea bit of an inbetween, you can choose to have a capped rate. So if the rates go above the capped rate, you won’t get hit and if they go lower then you get to benefit too!

Right, now that you’ve read all that, go have a smoko break. Then make a call to our savvy mortgage advisers who can sort it all out for you, no stress!

Got more time to kill? Check out our mortgage and lending options here.

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