The 7 Types of Mortgages – Which One Is Right For You?

Almost every Kiwi walks into a bank and gets the same 30-year table loan. It's the default... and for a lot of people, it's not the best fit. So, what are the other options, and which one should you actually have? In this episode, Ed and Andrew break down the seven genuinely different types of home loans (no, fixed vs. floating doesn't count). You'll learn: The one question that tells you which loan you're really looking atHow offset and revolving credit work, and which suits which personThe reducing loan that could save you meaningful interestThe lesson? The interest rate gets all the attention, but the structure of your loan can matter just as much. Let us know your thoughts by leaving us a voice message on the Property Academy Hotline⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ https://www.speakpipe.com/PropertyAcademy For more from Opes Partners: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Sign up for the weekly Private Property newsletter⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ https://www.opespartners.co.nz/newsletter-sign-up⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Instagram⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ https://www.instagram.com/opes_partners/⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠TikTok⁠⁠⁠⁠⁠ https://www.tiktok.com/@opespartners

• 0:08Speaker 00

  Hello and welcome along to the Property Academy Podcast. I'm your host, Stephen Knight.

• 0:11Speaker 01

  And I'm John Akum.

• 0:12Speaker 00

  And this is a show that helps Kiwis go from zero to five investment properties. So you can be financially free and stick around for the next 15 minutes because you're going to learn the seven genuinely different types of mortgages you can get in New Zealand, how to tell which one is right for you and how one couple went from paying interest on 400K to paying almost done. Now, almost everyone in New Zealand has the same type of home loan. You walk into a bank, you get a 30-year table loan and off you go. And we'll tell you about what one of those actually is in a moment. But this is effectively the default. And for a lot of people, it might well be the right one. But there are at least seven genuinely different types of mortgages.

• 0:55Speaker 00

  And I don't just mean fixed versus floating, because those are types of interest rates. I'm talking about the loan itself. So what actually makes the difference between the seven loans we're going to talk about today?

• 1:09Speaker 01

  So the big one is how are you going to pay the principal back? So are you going to pay it back at the end of the loan term? Are you going to pay back evenly over the life of the loan? Are you going to make bigger payments now and smaller ones later? And once you've figured that out, then you know what type of loan you might go for.

• 1:25Speaker 00

  Well, kick it off with that table loan. I mean, that's the standard one most people have.

• 1:29Speaker 01

  This is the most common loan if you go and take out a mortgage on your home. So this is where you've got the same repayment every fortnightly or month over the next 30 years. Now, that assumes that the interest rate stays exactly the same, which it won't. But they calculated and work out how many more payments you need to make for the duration of the loan to have it paid off at the end of the term. And at the start of the loan, your payments could be mostly interest and then a small amount of principal. And then when you get to the very end of the loan, it's mostly principal and hardly any interest.

• 2:00Speaker 00

  And that's the reason why that typically a mortgage really sucks at the start and is okay after you've had it for 10 or 15 years. Because as long as the interest rate is the same, your payment is just the same every single week. Meanwhile, inflation's increasing the cost of living and so therefore you get a pay rise to compensate for that. And your mortgage makes up a smaller share of your take home pay over time. That's generally what tends to happen.

• 2:29Speaker 01

  And I think one of the things that surprises people when they first take out a mortgage is in the first year, you pay so little off the principal that people look at their payments and go, I've paid so much to the bank, this is going to get me nowhere.

• 2:41Speaker 00

  But that is not the only type of loan, right? Then we have what's sometimes called the reducing or flat loan. And this is quite different.

• 2:49Speaker 01

  Yeah, I've never actually seen one of these being used in practice. But basically, the way this works is you pay the same amount of principal every single payment. So your payments at the start will be really, really high because you're paying a lot of principal, but also a lot of interest. And Westpac do have a facility for this. It's called a reducing or flat loan. And again, you're going to make bigger payments at the start and less at the end, but you're paying the same amount of principal over the life of the loan.

• 3:15Speaker 00

  I'll give you an example of that. So let's say you took out a half a million dollar loan, 5% interest rate. If you're on a normal table loan, right? Your payment every week for those 30 years of that loan is going to be $620 a week, give or take, right? 620 bucks, as long as your interest rate stays the same. And in your first ever payment, the first ever payment you make on a table loan, $138 of that is going to paying down the principal because you've got such a big loan, they're charging you a lot of interest on it. And then by your final payment of that $620 you're paying, about $617 of that goes towards paying back the principal.

• 3:57Speaker 00

  Because at the end, you've got a very small loan, so you're not getting charged that much interest. Now, if you look at the total amount of interest you paid over that loan, $466,000 is what you're paying in interest back to the bank. Now, a reducing loan is different, right? So if you've got 30 years to pay back a $500,000 loan, then every single year, you're going to be paying back about $16,000 to $17,000 worth of principal, right? And that's because you're paying the same amount every single year. But at the start, you're going to be paying a whole lot of interest because your loan's really big. And at the end, you're going to be paying a smaller amount of interest because the size of your loan is really, really small.

• 4:40Speaker 00

  And so with a reducing loan, the difference is that your repayment's high at the start and low at the end. So if we look at it, that same $500,000 loan, at the start, your repayment's going to be higher. It's not going to be $620 a week like a normal table loan. It's going to be about 800 bucks a week, so an extra $180. By the end though, your payment's going to be much smaller. You're only going to be paying $321 a week because it goes down over time. The repayment reduces because you've got a lower loan balance.

• 5:12Speaker 01

  It's a very odd way of doing it though, isn't it? Because you think if you take out a mortgage today, just with the cost of everything else going up, you want your payments to go up in line with inflation rather than go the opposite way?

• 5:22Speaker 00

  Well, that's one way to do it. But if you do take out a reducing loan, same assumptions, you're going to save about $90,000 in interest, right? So if you say, well, if you could afford an extra $180 a week today, maybe it makes sense to do that. And after about 11 or 12 years, you're going to find that your repayment on a reducing loan is going to be lower than if you're just stuck with a table loan. Although Westpac has it, so does BNZ. And you might be able to have to ask your different banks, but BNZ and Westpac are the ones that I know our mortgage advisors said, oh yeah, they do it. The only thing is, a lot of people don't know about this. And so almost nobody actually goes ahead and does it. But it might be something to consider. Number three is the offset mortgage.

• 6:05Speaker 00

  And again, I think this is one that, that a lot of people don't understand. You don't necessarily pay the loan down faster, but you can save a lot on interest. So let's say that you've got a $500,000 mortgage, 5% interest rate, again, keep things real nice and simple. But you've been saving up for a massive overseas holiday or an emergency fund. You've got $40,000 sitting in savings. Well, if you have an offset account and you put your $40,000 in that account, the bank will charge you interest on the balance, $460,000. But the difference between this and a revolving credit is with an offset, there are two separate accounts. Your money's in one account and your loan's in another.

• 6:48Speaker 00

  Whereas with a revolving credit, as you're about to see, it's more one account and you've got a massive overdraft. And then we've got the offset's cousin, which is a revolving credit.

• 6:58Speaker 01

  So revolving credit is basically like a big overdraft apart from, rather than pay overdraft rates of say 15%, you're paying just a normal home loan rate. Now, if you're going to use this effectively, all your pay goes into that account. So let's say your negative $80,000, you put all your pay in and that brings it down to negative 70,000. And then throughout the course of the month, you use your credit card and then pay that off at the end of the month without incurring any interest on that. Now, if you can manage your money well, this can reduce your interest because you've got money floating around your account at any time, reducing the balance that you pay the interest on. If you use this poorly and keep withdrawing the money, this can basically just mean that you get no further ahead.

• 7:40Speaker 00

  And also talk to us about the difference between reducing and non-reducing revolving credits.

• 7:45Speaker 01

  So there's two types of facility and it depends on which bank you're with as to which they'll offer. But the reducing limit means that at the end of say 30 years or 25 years, whatever the documented loan term is, you don't have any facility that you can draw back to. So the limit reduces in small increments every month. With a non-reducing, which is available at some other banks, that limit stays the same forever.

• 8:09Speaker 00

  I kind of think of it a bit like a principal and interest versus interest only type of situation where a reducing revolving credit is a bit like principal and interest because the amount that you can borrow goes down over time with interest only, it basically stays the same. And Peter gave me a really good example of where sometimes offset accounts can suit someone's situation a little bit better that are revolving credit. So he's got a couple that he's working with right now. And these guys have both been married before, they've both then been divorced and now they've got together. Now, because of that, they're thinking, we need to keep our money completely separate. We're not going to have joint accounts. Now, between the two of them, they've got about $300,000 to $400,000 in cash sitting

• 8:52Speaker 00

  in those separate accounts, like not really doing much. And they've both got a joint mortgage now on the home that they have. And if they used a revolving credit, then that's one account, right? So they'd have to both put their money into the revolving credit and that could save them a lot of money on interest because they've got $300,000 to $400,000 at 5% a year. That's $15,000 to $20,000 worth of cost that they're not going to incur. They're effectively going to save that. But the issue then is that their money's going to be intermingled. If they then break up, it's going to be very difficult to separate that out and whose money was it? Oh, you put in 200K Andrew and I put in 200K, but then you took $10,000 out to spend on a motorbike or repair your car, which always breaks down.

• 9:37Speaker 00

  And so actually, 200K of that is mine. And you see, it's very difficult because you've put it in one account. And so that's where they decided to refinance, to shift banks to a lender that has offset accounts, because then they can continue to have separate money accounts. So his money's in his account, her money's in her account, they can spend it if they want. But both of their money is being used to save interest on that joint mortgage. So that's a little nugget where you might not think of like, oh, actually an offset could suit my situation. But we've got another three types of loans to get through, Andrew. What is number five on the list?

• 10:14Speaker 01

  Number five is interest only loans. And this is where you pay the interest, but you don't pay the principal until the end of the loan term. So a lot of investors will use this because they'll buy a rental property and they want to keep the cash flow as low as possible. Sometimes owner occupiers might have these, but generally speaking, that might be if they're facing a tight cash flow situation. So maybe you've bought one house and you've got to sell your old house. And so therefore you've got two mortgages for a period of time. Or maybe you're building a property and so, so you're again staying in your house, but you've also got another mortgage drawing down.

• 10:48Speaker 00

  And the other thing to be aware of is that while you might get an interest only mortgage approved, it's not interest only forever, right? I kind of think of it as a principal and interest loan, a standard table loan with an interest only tag on. Talk to us about that.

• 11:04Speaker 01

  Yeah, so basically, most banks will approve you for five years, but some banks will go up to 10 years. And that's the length of time that you can pay just the interest until you have to start making principal payments. And then if your loan's documented over a 30-year term, a pretty standard term, and you've used 10 years interest only, generally speaking, that loan might be condensed over the 20 years, but not always.

• 11:25Speaker 00

  Yeah, sometimes they'll do 25 years, actually. But you've just got to be aware that if you're paying off your loan over 25 years rather than 30 years, the payment's going to be higher when you come off interest only. I mean, unless you extend it or refinance to another bank, there are ways to restructure your loan. But if you do nothing, that's what's going to happen. Number six is a loan where you have balloon payments, which sounds a bit fun, right? It sounds like a kid's party, which is how they get you, guys. So a loan with a balloon payment is where you take it down the loan, and usually this would happen for cars, and you draw down the loan and you pay a little bit of it back.

• 12:06Speaker 00

  But actually, your repayments are lower because you're going to make one big balloon payment at the end. And so this is very common in the States, but it's increasingly happening in New Zealand as well. So the way that would work is you go and buy a car, you want your repayments to be relatively low, so you take out a loan over five years. And rather than having it so that by the end of year five, you've completely paid off that car, the way they'll structure it is you're just paying off a little bit of the loan each week or each month that you're making your payment. And then at year five, you're going to pay the entire balance back, which might be, I'm going to make it up here, $20,000. Now, where you're going to come up from the $20,000?

• 12:50Speaker 00

  Well, typically, that's where the car company would expect you to trade the car in and then get a new car and keep on doing it again and again and again. So that's how balloon payment would typically work. And I was just catching up with somebody who's very senior in car finance, and we were talking about how bad this can actually be because while your payment might be lower because you're not paying back the loan that much, you're effectively just paying a lot and lot, a lot of interest and you're not actually getting a head, right? You're effectively almost, in some ways, leasing the car because you're just paying so much interest and not really creating an asset for yourself.

• 13:31Speaker 00

  But there are other types of loans that have balloon payments in New Zealand, specifically around property as well.

• 13:38Speaker 01

  One of the ones that we see a lot of is when people can take out a bridge loan. So that's when you buy a new property for yourself before you've sold your current house. So once your house sells, you know that you're going to be able to pay off that loan. But in the meantime, you take out the mortgage to buy the new property. And generally speaking, the interest might capitalise, that might add on to the loan, or you might be making those interest only payments. The other times I said are people that are maybe doing a construction loan. So again, you've bought some land, you're building a house, and you've got an increasing mortgage while you're already living in a property and maybe paying a mortgage or paying rent. And so in this case, you might have a component that's going to be paid off when you sell the other property. And the other example is if people are doing flips, so buying a property, renovating and

• 14:23Speaker 01

  then selling them at the end, that then is kind of like a balloon payment.

• 14:27Speaker 00

  Hey, look, I said I wasn't going to talk too much about interest rates, but there's quite an interesting little twist with ANZ's Blueprint to Build.

• 14:37Speaker 01

  Yeah, this is a good one. So if you're building, ANZ have got this product called Blueprint to Build. Now, it's not a different loan structure, it's basically just a discount off your interest rate, and it's pretty compelling. So you get 1.25% off the floating rate and 0.6% off any fixed rates. Now, that's for two years, which I can understand that people might go, well, that's a pretty good deal, two years, and then I'll see what other options are available at different banks potentially. But when I was talking to Peter from Opes Mortgages, he pointed out this really clever trick. So the discount applies to whatever rate you're on. So if you were to fix for 18 months or float for 23 months, and at the end of month number 23, you fix for five years.

• 15:21Speaker 01

  Now, you'd have to make sure that you're happy with a five-year fixed rate, but if you do, you keep that discount for the whole five years. So effectively, you've had five years plus your 23 months at the start.

• 15:33Speaker 00

  So it's seven years discount on a two-year offer. That sounds actually not too bad, it'd be worth looking into. On top of that, we've got another mortgage structure. What is it?

• 15:42Speaker 01

  Now, this is reverse mortgages. Now, this is everything backwards from a mortgage that you understand at the moment. So you still borrow against your house, but you don't make any payments at all, not even the interest. And the way that the bank gets his money back is when you die or sell the property, then the house gets sold and that loan gets repaid. So because of this, the interest is compounding onto the balance every month that the loan's in place, and the debt therefore is going up rather than going down like a normal mortgage. Now, generally speaking, this would be something that someone in their maybe 60s might take out. And the reason for that is because they might be asset rich, so they've got a property

• 16:24Speaker 01

  with equity in it, but they don't have any cash for their day-to-day living.

• 16:29Speaker 00

  And look, the last one I'll talk about is shared ownership, which is where you don't buy the house, but somebody else buys the rest with you and owns it alongside you. And while this isn't a type of mortgage per se with the bank, if you were to go to Kaing or his first home partner, or you use a private provider like YouOwn, or some developers are even doing this, this is where you might have a 5% deposit. Kaing or puts in a 10% or 15% deposit as well, and they own 15% of the house. And then you eventually buy them out at the market rate. And so that can help you get into home ownership a little bit more quickly.

• 17:10Speaker 00

  Now, if you've listened along recently, you'll know that KO also has the first home loan. That's where you can buy a property with just a 5% deposit. The reason why you might decide to go with a shared ownership option, though, is if you don't have the money to be able to afford that bigger mortgage repayment, right? Because if you take out a first home loan and you've got a 5% deposit, you're effectively needing to make the mortgage repayment on 95% of your home's value. If you do it through a shared ownership, well, you're not having to pay Kaing or interest on the money they put in, so you would only be paying the mortgage repayment on 80% of the home's value. Now, there are some downsides to that, obviously, because if your house goes up in value, you've

• 17:55Speaker 00

  got to be buying out Kaing or's share at that higher amount. So there are no free lunches, but there are some good schemes that can help you get into home ownership a little bit faster. Now, going through these seven different types of loans, though, Andrew, are there any here that you're thinking, I didn't look at that, but I might consider it?

• 18:14Speaker 01

  I think probably the most likely different loan that I might use, maybe a bridge loan at some stage, if I was between houses. But to be honest, I already use interest only loans all the time.

• 18:25Speaker 00

  I reckon I might, just with some of my Westpac loans, I'm like, maybe I'll just switch one across to a reducing loan and see how it goes, just to test it out. So I can say to everybody, oh, I tested it out, this is what happened. You're not into it? No, I can see it.

• 18:40Speaker 01

  I mean, the excitement is overwhelming.

• 18:42Speaker 00

  Look, we've been doing this for seven years now. I'm allowed to get excited about a different type of loan because over the last 15 minutes, you've learned the seven genuinely different types of mortgages you could get in New Zealand, the one question that helps you tell them apart, and how one couple went from paying interest on $400,000 to paying almost none. Right, let's wrap it up there, but please don't forget to rate review and subscribe to the podcast, really does help us get the message out to more people.

• 19:16Speaker 00

  Thanks for listening to the Property Academy Podcast. I'm your host, Seb at Night.

• 19:19Speaker 01

  I'm Andrew Nookel.

• 19:19Speaker 00

  We're going to be back here in tomorrow with even more daily strategies, techniques and insights to help you get the most out of the New Zealand property market. Until next time.