Different types of mortgages and how they work

Table loan

This is the most common type of home loan. You can choose a term up to 30 years with most lenders. Most of the early repayments pay off the interest, while most of the later payments pay off the principal (the initial amount you borrowed).

You can take a table loan with a fixed rate of interest or a floating rate.

Application fees for table loans range from nothing to over $1,000. Most lenders charge around $200 to $400. This is often negotiable.

Advantages:

Table loans provide the discipline of regular payments and a set date when they will be paid off.
They offer the certainty of knowing what your payments will be, unless you have a floating rate, in which case repayment amounts can change.

Disadvantages:

Fixed regular payments might be difficult for people with irregular income.

Revolving credit loan

Revolving credit loans work like a giant overdraft. Your pay goes straight into the account and bills are paid out of the account when they’re due. By keeping the loan as low as possible at any time, you pay less interest because lenders calculate interest daily.

You can make lump-sum repayments and redraw money up to your limit. Some revolving credit mortgages gradually reduce the credit limit to help you pay off the mortgage.

Application fees on revolving credit home loans can be up to $500. There can be a fee for the day-to-day banking transactions you do through the account.

Advantages:

If you're well organised, you can pay off your mortgage faster. This also suits people with uneven income as there are no fixed repayments.
Putting surplus funds into this account rather than a separate savings account will give bigger interest savings and also avoids the tax on the savings account interest.

Disadvantages:

It needs discipline! It can be tempting to always spend up to the credit limit and stay in debt longer.

Offset loan

An offset mortgage setup can reduce the amount of interest you pay on your mortgage. Typically, interest is payable on the full amount of a loan. But by linking your loan to any savings or everyday accounts you already have, you pay interest on that much less. For example, someone with a $400,000 mortgage and $20,000 in savings would only pay interest on $380,000. Subtract the savings from the total loan amount, and you only pay interest on what’s left.

The more cash you keep across your accounts from day to day, the more you’ll save, because interest is calculated daily. Linking as many accounts as possible – whether from a partner, parents, or other family members – means even less interest to pay.

Advantage:

You pay less in interest and pay off your mortgage faster. Typically there is no fixed term.

Disadvantage:

The linked savings accounts do not earn any interest when they offset a loan. That said, interest on debt is typically higher than the interest you would earn on savings, which makes the offset worthwhile.

Reducing loan

Reducing or straight line mortgages repay the same amount of principal with each repayment, but a reducing amount of interest each time. These are quite rare in New Zealand. Payments start high, but reduce (in a straight line) over time. Fees are similar to table loans.

Advantages:

We pay less interest overall than with a table loan because early payments include a higher repayment of principal.
These may suit borrowers who expect their income to drop, for example, if one partner plans to give up work in a few years’ time.

Disadvantages:

If we can manage higher payments, it would be better to take a table loan with payments high for the whole term, so we pay less interest.

Interest-only

We pay the interest-only part of our repayments, not the principal, so the payments are lower. Some borrowers take an interest-only loan for a year or two and then switch to a table loan. The normal table loan application fees apply.

Advantages:

We have more cash for other things, such as renovations.

Disadvantages:

Ultimately it costs us more. We will still owe the full amount that we borrowed until the interest-only period ends and we start paying back the loan.

Interest rate: fixed, variable or both?

Fixed interest rate loans

With a fixed rate home loan the interest rate you pay is fixed for a period of six months to five years. At the end of the term, you can choose to re-fix again for a new term or move to a floating rate.

Advantages:

You know exactly how much each repayment will be over the term.
Lenders often compete with fixed rate specials.
You can lock in lower rates if market interest rates are rising.

Disadvantages:

Fixed rates often have limits on how much you can raise repayments or make extra payments without paying charges.
If you take a long term, there is a risk floating rates may drop below your fixed rate.
If you choose to sell your property and/or break a fixed loan you may be charged a ‘break fee’.

Capped rates are a variation where the interest rate can’t rise above a certain point, but will drop if floating rates drop below the capped rate.

Floating rate (or variable rate)

Lenders of floating rate loans will lift or lower the interest rate as interest rates in the wider market change, normally linked to the Official Cash Rate (OCR). This means your repayments may go up or down.

Advantages:

You have more flexibility to make changes without penalty, such as paying off the loan early or changing the loan term.
It’s easier to consolidate other, more expensive debt into floating rate loans by borrowing more.

Disadvantages:

Floating rates have historically been higher than fixed rates.
When rates go up the repayments also go up, putting a squeeze on your budget.

A mix of fixed and floating

You can split a loan between fixed and floating rates. This lets you make extra repayments without charge on the floating rate portion.

Splitting a loan can give you a balance between the certainty of a fixed rate and the flexibility of a floating rate. How much of your loan you have in each portion depends on which of these is more important to you.

Mortgage type FAQs

What exactly is a mortgage? How does it work?

A mortgage (or home loan) is money borrowed to buy a property, with the property acting as security. You typically repay it over 25-30 years with interest. Each repayment includes principal (the borrowed amount) and interest (the cost of borrowing). Early on, most goes to interest. Over time, more goes to principal as the balance shrinks. Most mortgage holders have 'table loans', where you pay the same amount each period.

What do 'term', 'principal' and 'interest' mean when it comes to mortgages?

The term is how long you have to repay your mortgage (typically 25-30 years). The principal is the amount you borrowed – each repayment reduces this. Interest is what the lender charges for borrowing their money, calculated as a percentage of your remaining principal. Don't confuse 'term' with 'fixed term' – that's how long your interest rate is locked in for (like two or five years).

Which mortgage type is best for first-home buyers in New Zealand?

Many first-home buyers use a mix of fixed and floating rates. You could, for example, fix 70-80% for predictable repayments and budgeting certainty, while keeping 20-30% floating to make extra repayments without penalties. Table loans (same payment each period) are most common because they're straightforward. Talk to your bank or mortgage broker about what suits your income and goals – there's no one-size-fits-all answer.

Which is better for me, a fixed or floating mortgage?

Fixed rates lock in your interest rate for six months up to five years, giving you predictable repayments but limiting extra payments. Floating rates move with the Official Cash Rate – less predictable but you can make unlimited extra repayments to save on interest. Most Kiwis split their mortgage between both to get stability and flexibility. Choose based on whether you value certainty or flexibility more.

What happens when you split a mortgage between fixed and floating?

Splitting gives you both stability and flexibility. You might fix 70% for predictable repayments and keep 30% floating for penalty-free extra repayments. You can even 'ladder' your fixed portions across different terms (one year, two years, etc.) so only part comes up for renewal at once. The floating portion moves with interest rates, while extra payments chip directly off the principal, saving you money.

How does a revolving credit mortgage work?

Revolving credit works like a giant overdraft on your home loan. Your income flows into the account, expenses come out, and you're charged interest on the daily balance. Money sitting in the account reduces what you pay interest on. You can withdraw up to your credit limit anytime. This suits disciplined people who actively manage their cash flow – it can help you pay off your mortgage faster.

Can I withdraw money from my revolving credit mortgage?

Yes – as long as you're within your credit limit, you can withdraw funds anytime. As you pay down the balance, you create available credit you can access. But beware treating your home like an ATM. Every withdrawal adds to your mortgage balance and interest costs. Some revolving credit mortgages have 'reducing limits' that gradually lower over time, helping ensure you actually pay off your home.

What are the disadvantages of revolving credit home loans?

Revolving credit requires serious discipline. It's tempting to spend up to your limit, keeping you in debt longer. Application fees can reach $500, plus potential transaction fees. You'll miss out on savings interest (though offsetting mortgage interest usually makes this worthwhile). Without fixed repayments, there's no forcing mechanism to pay down your mortgage. This suits organised folks, not set-and-forget types.

What is the best mortgage structure for irregular income?

Revolving credit works well for variable income – no fixed repayments, so you pay more in good months and less when tight. Or you could keep your mortgage floating for penalty-free extra repayments when cash flow allows. You want to avoid fixing too much, as you need flexibility. A buffer – an emergency fund or offset account – will help you cover lean months so you can still meet minimum repayments.

Can I make extra repayments on a fixed rate mortgage?

Yes, but within limits. Most lenders allow 5–20% extra per year without penalties. If your repayment is $3000 monthly, you might manage $3500 without breaking your fixed rate. Larger extra payments typically incur 'break fees', especially if interest rates have dropped. Many people split their mortgage – fixing most for stability, keeping a portion floating for penalty-free extra repayments.

What's the difference between offset and revolving credit mortgages?

Offset mortgages link separate savings accounts to your home loan. Your savings balance reduces the mortgage amount when calculating interest. You make regular fixed repayments, and savings stay accessible. Revolving credit combines your mortgage and banking into one account – income in, expenses out, with no fixed repayments. Offset suits set-and-forget savers. Revolving credit suits people who actively manage their daily cash flow.

How much can I save with an offset mortgage?

Savings depend on how much you keep in your offset account. If you had a $500,000 mortgage at 6% with $50,000 in offset savings, you'd save $3000 each year in interest. It can save tens of thousands and shave years off your loan.

Are interest-only mortgages still available in New Zealand?

Yes, but with strict criteria. You only pay interest monthly – not reducing the principal. These are mainly for investors now, not owner-occupiers. Lenders typically limit interest-only periods to one to five years, then you switch to principal-and-interest repayments. You'll need a larger deposit to qualify. While they help short-term cash flow, they're more expensive long-term as you're paying interest longer without owning more of your home.