What’s The Difference Between a Mortgage and A Home Loan?

The words ‘Mortgage’ and ‘Home loan’ are often misunderstood, and both are often used to describe money lent to a new homeowner by a bank to purchase a property.

There is confusion regarding the terminology and what the terms mean in theory and in practice. The mortgage & the home loan are separate legal obligations.

Home Loan – Allows you to borrow a lump sum for a specific purpose.

New homeowners will often ask ‘what is the cost of a mortgage’ that the bank has advanced to assist them to purchase a property.

What they mean to say is ‘what is the cost of the home loan that has been advanced’ i.e. home loan repayments and interest rates

Mortgage – Or mortgage document provides the bank with the security for the home loan that has been advanced to purchase a property.

A standard mortgage document includes several requirements that the property owner has to comply with. If they are not complied with the bank may force the sale of your property.

Standard requirements are:

The advanced home loan must be repaid to the bank. The home loan is secured over the property and must be repaid under the home loans terms of agreement. Failure to pay the home loan is considered a default under the terms of the mortgage.
All land rates relating to the property must be paid. Failure to pay the rates is considered a default under the terms of the mortgage.
The property must be kept insured. This ensures that if the house is destroyed or damaged that the bank’s loan will be repaid.
The property must be looked after and keep it in a good state of repair. The property owner must also ensure that the house complies with Building Act and Local Authority requirements so it can remain insured.

What Are the Different Types of Home Loans?

As a mortgage broker my role is to ensure you understand the different types of home loans.

Each lender markets their suite of home loans differently, so it appears to consumers that there are many types of home loans to choose from.

This makes if difficult when selecting the most appropriate home loan for your requirements.

There are 5 main types of home loans available in NZ as follows:

Table – floating or fixed interest
Reducing (Non-Table) – floating or fixed interest
Off Setting – floating interest
Revolving – floating interest
Interest-Only – floating or fixed interest

Depending on the lender, the home loans can have repayments set for weekly, fortnightly, or monthly.

Different Types of Home Loans Explained

Table Home Loan – The table home loan can have either floating or fixed interest rates with interest & principal repayments.

If floating, interest rates are variable, and they move up and down with the market.
You can pay off lump sums but cannot redraw from the facility easily.

If fixed, interest rates can be locked in from 6 mths to 5 years which gives stability of repayment for the fixed term.

Home loan repayments are set at a minimum level or increased to the level you want by adjusting the repayment term. The maximum term would be 30 years.

Initial payments of interest are higher than the principal repayments, however as you pay off the principle, the interest cost reduces, and you will end up paying more principle of each subsequent home loan repayment as you move through to the end of the repayment term.

Reducing Home Loan – Similar to the table loan however the main difference is that the principal repayments are set at the same level for the term of the mortgage.

As you pay down the mortgage the interest cost reduces as the amount you owe reduces.

This means that the initial repayments on a reducing home loan make this a more expensive option than a table loan in the short term.

It is often more affordable to take a table loan if the budget is stretched.

Off Setting Home Loan – These types of facilities can assist to reduce the amount of interest that you pay.

Essentially you will have separate nominated savings or transactional bank accounts. The total balance of these accounts is then subtracted off your Offset home loan and your pay interest on the remaining balance.

Interest rates are floating.

Revolving Credit – As with off setting mortgages, these types of facilities can also save on interest cost.

The idea is that with part of your mortgage you can use surplus income (after expenses and the home loan have been paid), to keep the loan balance as low as possible.

Your income is credited into the account and all expenses including the home loan are paid out of the facility.

Often a credit card is used to assist with keeping the loan balance as low as possible. Expenses are paid with the CC where you have say 30 days free credit. Before it becomes due, pay the CC off. During that period you will have saved interest on your home loan.

You need to be in good control of your finances to use this facility well.

What’s The Difference Between a Mortgage and A Home Loan?