What is the key difference between a table mortgage and an interest-only mortgage in terms of monthly payments?
Correct Answer
B) Table payments cover principal and interest; interest-only covers interest only
A table mortgage requires regular payments of both principal and interest, gradually reducing the loan balance over time. An interest-only mortgage requires payments of interest only for a specified period, with the principal remaining unchanged until the interest-only period ends.
Why This Is the Correct Answer
A table mortgage has level payments that each include interest and some principal, so the balance falls. An interest-only mortgage pays just the interest for an agreed period, so the balance stays the same until principal repayments start.
Why the Other Options Are Wrong
Option A: Table loans have payments that vary, while interest-only payments are fixed
Table payments are a level amount for a given rate; either type's payment changes when a floating rate moves.
Option C: Table loans always carry a higher interest rate than interest-only loans do
Rates depend on the rate type and the lender; interest-only terms are often priced the same or higher, not lower.
Option D: Table loans need mortgage insurance, while interest-only loans never need it
Low-equity premiums or insurance depend on the LVR, not on whether the loan is table or interest-only.
Deep Analysis of This Finance Question
This question tests understanding of fundamental mortgage payment structures, which is crucial for real estate agents advising clients on financing options. Table mortgages (also called principal and interest mortgages) require borrowers to pay both principal and interest components each month, resulting in gradual loan balance reduction over the term. Interest-only mortgages allow borrowers to pay only the interest portion for a specified period, keeping the principal balance unchanged. This distinction significantly impacts cash flow, total interest paid, and equity building. Understanding these differences is essential for agents to properly advise clients on suitable mortgage products based on their financial circumstances, investment strategies, and long-term goals. The payment structure affects affordability assessments, loan serviceability calculations, and overall financial planning strategies.
Background Knowledge for Finance
Mortgage payment structures are fundamental to property financing in New Zealand. Table mortgages (principal and interest) are the traditional structure where monthly payments include both principal repayment and interest charges, gradually reducing the loan balance. Interest-only mortgages allow borrowers to pay only interest for a specified period (typically 1-5 years), after which payments usually convert to principal and interest. These structures affect cash flow, equity building, and total interest costs. Real estate agents must understand these differences to advise clients appropriately and ensure compliance with responsible lending obligations under the Credit Contracts and Consumer Finance Act.
Memory Technique
Think of TABLE as 'Takes Away Balance with Every payment' - table mortgages reduce the principal balance with each payment. Interest-only is like 'renting money' - you pay to use it but don't own any more of it over time, just like renting a house doesn't build ownership.
When you see mortgage payment structure questions, remember TABLE mortgages 'Take Away Balance' while interest-only mortgages are like 'renting money' - the balance stays the same during the interest-only period.
Exam Tip for Finance
Focus on what each payment includes: table mortgages always include both principal AND interest in each payment, while interest-only mortgages include ONLY interest during the specified period. The key word 'only' in interest-only is the giveaway.
Real World Application in Finance
A property investor considering a rental property might choose an interest-only mortgage to maximize cash flow during the initial years, paying only interest while rental income covers costs. After the interest-only period ends, payments increase significantly as principal repayments begin. Alternatively, an owner-occupier might prefer a table mortgage to steadily build equity and ensure the loan is fully repaid by retirement. Real estate agents must explain these implications to help clients choose appropriate financing structures.
Common Mistakes to Avoid on Finance Questions
- •Confusing payment structure with interest rate type (fixed vs variable)
- •Assuming interest-only mortgages always have lower interest rates
- •Thinking mortgage insurance requirements depend on payment structure rather than loan-to-value ratios
Related Topics & Key Terms
Key Terms:
More Finance Questions
What is the current standard LVR (Loan-to-Value Ratio) restriction for owner-occupier residential property purchases in New Zealand?
What is a key advantage of a revolving credit mortgage facility?
When assessing a mortgage application, which factor is typically given the highest priority by New Zealand lenders?
James has been contributing to KiwiSaver for 4 years and wants to withdraw funds for his first home. His KiwiSaver balance is $45,000, but $15,000 consists of government contributions and employer matching. What is the maximum he can withdraw for his house deposit?
What is the main advantage of a table mortgage compared to an interest-only mortgage?
- → What is the maximum amount a first home buyer can withdraw from their KiwiSaver account for a house deposit?
- → What does LVR stand for in New Zealand mortgage lending?
- → A bank checks how much of a borrower's gross income would go on debt repayments. The borrower earns $80,000 a year, already pays $800 a month on other debts, and the new mortgage would cost $2,200 a month. What share of gross income would the repayments take?
- → Sarah earns $80,000 annually and wants to borrow $400,000. What is her debt-to-income ratio?
- → A property is valued at $600,000 and the buyer has a $100,000 deposit. What LVR would this loan represent?
- → Which of the following is NOT typically considered by banks when assessing lending criteria?
- → How long must a KiwiSaver member have been contributing before they can withdraw funds for their first home?
- → Which type of mortgage allows borrowers to make additional payments that can be re-borrowed later?
- → A couple with a combined income of $120,000 wants to buy their first home for $650,000. They have a 15% deposit. What is their LVR?
- → A borrower took out a $400,000 mortgage and has paid $2,200 every month for five years. The balance owing is still exactly $400,000. Which repayment structure is this most likely to be?
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