The Law Lend
Helping You Choose "The Right Mortgage".
Mortgages are something that unfortunately most of us have but would rather we didn't. Choosing the right
mortgage is important because it can affect how much interest we pay, how long it will take to repay and
sometimes what additional costs we may have to pay as well.
"The Right Mortgage" is a combination of a number of factors. These include the type of mortgage, the term of
the mortgage and the type of interest rate. Some mortgage lenders and brokers use complicated terms or
jargon to describe different mortgage products. They do this to either make their mortgage products appear
different from others or to make it appear that choosing a mortgage is harder than it really is.
It isn't! This Guide has been prepared by Law Lend and your Law Lend lawyer to make things simple and to
help you choose the right mortgage for you.
What Do You Want And What Do You Need?
The best starting point is to identify what you most want and need from your mortgage. Which one of the
following statements best describes your feelings about your mortgage? You can tick more than one!
I need to have the lowest monthly, fortnightly or weekly payment possible and this is more important
than how long it takes to repay the mortgage or how much the total interest comes to.
I have worked out the maximum amount that I can afford to pay off my mortgage every month, fortnight
or week and I want to repay the mortgage as fast as possible.
I want to have the flexibility to make extra payments into my mortgage and I want to be able to redraw
amounts up to my mortgage limit whenever I want to.
I don't want my mortgage payments to change for at least one to five years while I get "on top of things".
I may want to sell again soon or at least within the next 5 years and I want to be able to repay my
mortgage without any penalties.
These statements show the range of objectives that different people can have for their mortgage. The
following notes will provide you with details about the different solutions available to meet the objective(s)
that you may have. Simply refer to the different topics covered in the Guide to obtain the information you
The "Equal Payment" Mortgage.
Equal weekly, fortnightly or monthly payments over the whole mortgage term. The payment may change from
time to time if interest rates change. This mortgage type is sometimes called a Table Mortgage because
lenders used to refer to a table to calculate what the payment would be.
A mortgage for $120,000 at an interest rate of 6% over a term of 25 years would have "equal payments" of $773
per month. The total interest cost over the term, assuming no interest rate change, would be $112,000.
Payments are maintained at a set level, subject only to interest rate movements.
Most affordable amortising (ie loan is repaid over the term) loan structure.
Repayment of loan balance occurs more slowly until well into loan term.
Total interest costs over full loan term are greater.
The "Reducing Payment" Mortgage.
Weekly, fortnightly or monthly payments start out at one amount but then reduce by the same small amount
each payment so that over time the payment amount becomes quite small. The payment may change from
time to time if interest rates change.
A mortgage for $120,000 at an interest rate of 6% over a term of 25 years would require the first monthly
payment to be $1,011.50. Each monthly payment after that would reduce by $2.04 so that after 10 years, for
example, the payment would be reduced to $767. The total interest cost over the term, assuming no interest
rate change, would be $92,000.
Regular repayment amount reduces at each payment cycle.
Total interest costs over the full loan term are lower.
Well suited to dual income households where children may cut one income off later on.
Initial regular payments are higher than Table loan basis.
The "Revolving Credit" Mortgage.
This mortgage type is given a variety of names by different lenders including, Flexi, FlexiPlus, Orbit, Mortgage
Plus and others. A revolving credit mortgage is approved with a limit, being the maximum amount that you can
borrow at any time. Each month you must pay the interest that has accrued on the balance during the
previous month. It operates in a similar fashion to an overdraft.
You can redraw or repay whatever and whenever you want up to the mortgage limit. Often a borrower's
earnings can also be paid directly into the mortgage so that mortgage interest savings can be obtained.
A revolving credit mortgage with a limit of $120,000 and an interest rate of 6% would have an interest cost of
$600 per month if fully drawn for the whole month. The total interest cost over the term is more difficult to
quantify as it will depend on how much "revolving" goes on! At worst, if the $120,000 remains fully drawn over
a 25 year term the total interest cost would be $180,000, plus you would still owe the mortgage amount.
Allows consolidation of all borrowings (Mortgage, loans, HPs, credit card) into one single loan account.
Interest rate charged is usually the prime housing rate thereby the higher rates associated with credit cards
and personal loans are avoided.
Interest is only charged on the daily balance owing and not the facility limit.
Funds are on call and borrower has instant access (by cheque, telephone banking) for any future borrowing
Enables efficient use of surplus cash or savings which can be applied to reduce loan balance until required
Generally a set monthly charge covers all transaction fees and charges.
Funds can be used for any purpose.
Salary and other income can be deposited into mortgage to reduce debt balance and therefore interest
Interest rate payable is the floating rate and not eligible for fixed rates.
Interest rate may be a small margin over the prime residential rate.
No structured program of principal repayment. Can be left owing the original loan amount many years
Requires sound personal/financial discipline to resist extravagant or impulsive purchases.
Total interest cost over the long term can exceed other loan types.
Can be subject to review and facility withdrawn if borrower's circumstances adversely altered.
The "Interest Only" Mortgage.
Monthly payments of interest are only paid and no reduction of the mortgage amount is made over the term.
Sometimes called a "flat" mortgage.
A mortgage for $120,000 at an interest rate of 6% would have "interest only" payments of $600 per month. The
total interest cost over a 25 year term (ie, for comparison purposes as generally the maximum term is only 5
years) assuming no interest rate change, would be $180,000.
Lowest loan payments as no principal being repaid.
Appeal more to property investors wishing to maximise cashflows and who can obtain taxation benefit
through deductibility of interest charges.
Useful to minimise loan commitments prior to a future event. Eg, spouse takes 1 year maternity leave and
then returns to work.
Generally only available for short terms of up to 5 years.
No structured principal repayment therefore amount owing at end of term is same as at the beginning.
Lenders require greater equity levels.
The Accelerated Repayment Mortgage.
You can accelerate the repayment of your mortgage by working out the maximum regular amount you can
afford to pay for the mortgage (being an amount greater than the payment required by the lender) and then
making a commitment to yourself to pay this amount on an ongoing basis.
A mortgage for $120,000 at an interest rate of 6% over a term of 25 years would require "equal payments" of
$773 per month. If the borrower can afford to make regular monthly payments of $860 (ie, $20 more a week)
then the total interest cost over the term, assuming no interest rate change, would be $86,400. This is a
saving of over $25,000 compared to equal payment mortgage cost of $112,000 and would reduce the mortgage
term by five years!
Lowest interest cost and shortest term of any amortising mortgage type.
Can always reduce amount of payment back to the lender required minimum.
Can reduce payment amount to even below the original required minimum amount or have a payment
holiday by restructuring loan over balance of term.
Requires discipline to maintain voluntary higher payments.
The "right mortgage for you" will be a combination of one or more of the above mortgage types or products
together with the type of interest rate you prefer. There are three main types of interest rate although just
two types are offered by the majority of lenders. These rates are "Floating" or "Variable", "Fixed", and
Floating / Variable Rate: - Benefits:
Competitive interest rates which fluctuate with market trends.
Interest rate generally reviewable on one months notice being given.
Provides greater flexibility for voluntary principal repayments being made without penalty.
Floating / Variable Rate: - Disadvantages:
Interest rate movement can expose borrower to increased payments.
Increased payments can place pressure on borrower's cashflows.
No limit on the interest rate and therefore repayment amount that may be payable.
Fixed Rate - Benefits:
Provides certainty of regular loan payments for duration of fixed term.
Provides protection against increasing interest rates in market.
Does not expose borrower's cashflows to risk.
Fixed Rate - Disadvantages:
Borrower unable to receive advantage of reducing interest rates.
Voluntary principal payments and early repayment generally incur a penalty charge.
Capped Rate – Benefits:
An interest rate with a known upper limit or "cap" but possibility of a lower rate if interest rates fall during
the term of the capped rate.
Provides certainty as to the maximum interest rate for a fixed term while retaining opportunity to benefit
from any fall in interest rates.
Capped Rate – Disadvantages:
The rate is normally higher than a fixed rate of the same duration.
NB. The lender's current interest rate at the time you are gathering information about your options or making
an application will not necessarily be the same as the interest rate that you start paying when your mortgage is
settled or "drawndown". For floating rate mortgages, almost all lenders will apply their then current floating
interest rate (ie the floating rate as at the date the mortgage is settled) to your new mortgage. For fixed rate
mortgages, some lenders will hold the "quoted rate" (ie the fixed rate as at the date of loan offer acceptance)
until settlement or for a fixed period such as 30 or 60 days. Some may charge an "interest rate holding fee" to
do this. Others do not hold or reserve the rate but apply the rate as at the date of drawdown. These
differences can be good or bad depending on whether rates are going up or down!
The Cocktail Mortgage.
The Cocktail or "split mortgage" is a mortgage that can give you the "best of all worlds"! You can have part of
your mortgage on a fixed interest rate and part floating. Part could be interest only or revolving credit and
part equal payments. Here are some examples of what you can achieve with a mortgage cocktail.
A mortgage of $120,000 is split between $100,000 3 years fixed rate to provide certainty for most of the
mortgage repayment amount and $20,000 on floating because the borrower wants the flexibility to make
some additional repayments without penalty during the first 3 years.
An equal payments mortgage of $120,000 is repaid at $860 per month instead of the minimum required
$773 but after 5 years the payments are reduced to $656 by restructuring the mortgage over a fresh term of
A mortgage of $120,000 is split $60,000 equal payments over 12 years with a 5 year fixed rate and $60,000
revolving credit at the floating interest rate. The borrower achieves a spread of interest rate risk, ie 50%
fixed and 50% floating, the flexibility of a large "overdraft" and the discipline of repaying half the mortgage
over a 12 year term at a monthly cost of not a lot more than an equal payment loan over 25 years.
Fees, Costs and Valuations.
Establishment Fees: There are one-off loan approval, documentation and other costs incurred by lenders
when they process new mortgages. Most lenders currently attempt to recover all or some of these costs by
charging you an "establishment fee". This can normally be added to the mortgage amount or paid separately as
you choose. Some lenders are more willing to negotiate than others and the fee will often reflect how simple
or complex, safe or marginal, competitive or limited, the mortgage is or your options are.
Lender's Mortgage Insurance: Where the mortgage amount is generally over 80% of the value of the security,
most lenders take out "Lender's Mortgage Insurance" to protect them against the extra risk of low equity
lending. The mortgage insurer must approve such loans in addition to the lender and the one-off cost of the
insurance is added to the mortgage amount. This can mean that mortgage approval takes a little longer and
you may have to provide some additional information.
Valuations: To approve your mortgage a lender must decide what your property (ie your security) is worth.
This is normally done by either considering the purchase price, or the current valuation as established by either
Quotable New Zealand (used to be called the Government Valuation) or an independent/registered valuation.
The larger the mortgage amount or the higher the loan to security ratio ("the LVR") the more likely the lender
will want a registered valuers report. An application can normally be made without a valuation but the lender
may then require a valuation as a condition of their mortgage offer.
Choosing "The Right Mortgage for you" takes into account these fee, costs and valuation requirements but
also balances them up against the other important considerations of product type, interest rate, lender
flexibility and convenience.