Frequently Asked Questions
Different Mortgages and Home Loans
A P&I loan structure is the same as a table loan structure. The loan is repaid in fixed intervals at a fixed amount until the principal balance is empty. This structure results in high interest and low principal repayments at the beginning of the loan. Towards the end of the loan the borrower is paying high principal and low interest repayments. This loan is highly suited to people with regular incomes to match their outgoings.
This repayment structure has typically higher principal and interest payments. The principal payments remain the same the life of the loan and the interest payments declines according to the balance outstanding. This structure typically offers less total interest charged over the life of the loan compared to P&I loans.
An interest only structured loan requires interest to be repaid on the outstanding balance and for the principal to be repaid at the end of the loan term. This is usually done by refixing the interest only loan into a P&I repayment or the sale of the asset repays the loan. What is important to note is that the principal balance remains the same at the end of the interest only period. I/O loans are useful for freeing up cash flow when repaying the loan is not the priority.
This is a “revolving credit facility” and is comparable to a large overdraft. The balance is charged at a higher interest rate than fixed rates, however you are able to pay off as much of the loan as you like and also withdraw from what you have repaid. This provides the ultimate flexibility to some borrowers and can allow them to repay their mortgages very quickly, while also keeping capital free for further investment.
A loan used to “bridge” the gap between the sale of a property and purchase of a new one. Or, the time gap between receipt and expenditure of money. These loans have higher interest rates and are short-term. They require proof income will come in and an advance is given to the borrower upfront. Once income comes in, they can repay the bridging loan or refix into a P&I loan.
These loans are targeted at people 60 and over. Usually these are used to provide retirement funds or extra cashflow. The amount lent is relatively low, but it is affixed against the house. These loans can be harmful without proper scope and guidance. We would recommend anyone interested in this loan to speak to their mortgage adviser if it is best for them first.
Also known as balloon loans, unpaid interest is added to the principal during a loan capitalization period. This keeps cashflow free and is best suited to projects that require the borrower to make minimal repayments. The loan can then be repaid in full on the sale of a project or fixed into a short term P&I. These loans are used predominantly to fund construction projects.
Interest Structures
These interest structures usually last 6 months to 5 years. The borrower is generally restricted to paying a fixed amount, but some lenders allow a small margin over payments. However, if the loan is repaid in full, or too much is being repaid, the borrower will incur penalties such as a “break cost”. Once the loan ends the borrower has a decision to change to a new fixed rate plan, alternatively they will be put on a floating variable rate. These interest structures create a reliable repayment plan but are also restrictive once locked into, and can lead to high break costs if done incorrectly.
This interest structure has the most flexibility, however it usually has a higher interest rate than short-term fixed rates. Under a floating/variable structure the client is entitled to repay as much of the mortgage as they want and also at any time they can take the whole or a proportion and place it into a fixed term interest structure. Self-employed borrowers will benefit the most under this plan, as the effect of the high interest rate is offset by large lump sum repayments. Interest is paid according to the live floating rate of the day. If the rate rises of drops, this will impact the interest repayment.
This structure can reduce the total amount of interest a borrower pays on their loan by only charging interest on the outstanding balance, minus their savings and cheque accounts. This, similar to a revolving credit facility, increases flexibility of repayment for the borrower. The savings and cheque accounts will not earn interest when linked to an Offset loan. This does not matter as much though, as this forgone interest does incur tax. When considering any product it is really best to speak to an Advisor to help you navigate your options, suitable to your circumstances.
As the name suggests, these interest structures breaks the loan into two proportions. The largest portion (80%) is kept fixed and the remainder (20%) is floating. This provides some flexibility and offsets future interest rate change risk. We recommend this type of structure to anyone interested on repaying their loan down quickly. We tailor our loan packages to our clients and never simply offer products without placing the clients goals first.
This option is available to the borrower as part of the banks “undue hardship” policies. It allows a borrower, upon an approved application, to take 3 months break from making payments. The interest accrues to the principal, and the loan is refixed at the end of the holiday back into a P&I loan if the borrower can afford it. This ideally allows the borrower the time required to repay the mortgage instead of defaulting.
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