Money

Mortgages

Updated 07 Feb 2007
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Introduction

We explain everything you need to know about financing a house purchase.

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Plus use our handy calculators: Repayment calculator and Rent or buy and see our new report on mortgage break fees.

And for the latest mortgage rates, see our ConsumerSaver latest rates guide.

Latest rates


Our regularly updated database of mortgage rates has now moved to the new ConsumerSaver - latest rates service.

Types of mortgage

There are four basic types of mortgage (for clarity, these descriptions assume interest rates do not change):

  • Table mortgage: This is the most common form. The repayments do not alter over the life of the mortgage. At the beginning, most of each repayment is interest, by the end you're mostly repaying principal.

  • Revolving-credit facility: This is a large overdraft secured by your house, which you usually access using a cheque account. Some lenders put a diminishing credit limit on the facility to make sure you reduce the debt over time.

  • Reducing mortgage: On each repayment, you repay the same amount of principal. This reduces the interest charge each time, so each repayment is less than the previous one.

  • Interest-only mortgages: These are becoming popular as a means of offsetting high house prices. When you pay interest only, monthly repayments are financially more digestible. But you'll have to start paying off the mortgage at some point. And, unless house prices head upwards, you're not building up equity in your home. The risk is that if property prices fall, your property will be worth less than what you paid for it. If you have to sell, you could end up deeper in debt.

Interest-rate options

There are two main types of interest-rate (and two hybrids):

  • Floating: The lender can change the interest rate on the mortgage whenever they choose. A floating-rate mortgage offers you wide scope to change your plans too. You can make extra repayments, increase or decrease repayments (subject to some limits), or repay the mortgage early, without copping penalty fees.

  • Fixed: The lender cannot change the interest rate for a certain period, such as a year. This gives you certainty, and floating rates are usually higher than fixed rates prevailing at the same time. This explains why fixed-rate mortgages are very popular these days. But with a fixed-rate mortgage you will often face a penalty if you want to change the conditions.

  • Capped: A compromise is a capped rate. If floating rates rise above the cap, the cap doesn't follow, but if floating rates drop below the cap, the capped rate drops too.

  • Discounted rate: Another alternative to a fixed-rate deal is to have a discounted rate. This guarantees you stay below the floating rate - whichever way it moves - for the length of the discount, provided you have all of your loan in it.


See our Mortgage strategies report for more on the pros and cons of different mortgage-type and interest rate options.

More information

Buying a home is probably the biggest financial investment you'll make in your lifetime. So it's one to get right. Before you take the plunge, it's worth educating yourself a bit about home ownership.

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Jargon buster

You'll encounter a lot of jargon around home loans. Here's what it all means.

Establishment fee: Also called the "application fee", this is the fee to set up the mortgage. The establishment fee may be set at a minimum or maximum dollar amount, or some percentage of the amount borrowed. It is often negotiable.

Lending limit: The maximum percentage of the house valuation the lender is generally prepared to lend up to. In some circumstances, lenders may lend a higher percentage but could charge extra for this.

Mortgage: Strictly speaking, this is a legal document that secures property for a loan. But, like most people, we also use the term to mean a loan to buy a house. The "mortgagee" is the lender and the "mortgagor" is you, the borrower.

Mortgagee sale: If you cannot repay the mortgage, as a last resort the lender sells the house to get its money.

Principal: The amount you borrow.

Reducing mortgage: Each repayment comprises the same amount of principal. That means the interest charge is less each time, so each repayment is less than the previous one (assuming interest rates don't change).

Revolving-credit facility: Essentially a large overdraft secured by your house, which you access using a cheque account or credit card. The interest rates on revolving-credit facilities are usually around the same as normal floating rates.

Table mortgage: The most common form of mortgage. Unless interest rates change, the repayments do not alter over the life of the mortgage. But the interest and principal components of each repayment do change. At first, most of each repayment is interest - by the end, most is principal.