What is the main advantage of a table mortgage compared to an interest-only mortgage?
Correct Answer
B) Principal is gradually repaid, building equity over time
A table mortgage (principal and interest) gradually reduces the principal balance with each payment, building equity over time. Interest-only mortgages only pay interest, so the principal remains unchanged and no equity is built through mortgage payments.
Why This Is the Correct Answer
Option B correctly identifies the key advantage of table mortgages - the gradual repayment of principal that builds equity over time. With each payment, a portion goes toward reducing the loan balance, meaning the borrower owns an increasing share of the property. This equity building is automatic and forced, creating a savings mechanism that interest-only mortgages lack. This fundamental difference makes table mortgages attractive for owner-occupiers building long-term wealth through property ownership.
Why the Other Options Are Wrong
Option A: Lower monthly payments throughout the loan term
Table mortgages typically have higher monthly payments than interest-only mortgages because they include principal repayment in addition to interest. The principal component means borrowers pay more each month, not less. Interest-only mortgages offer lower monthly payments initially, making option A factually incorrect.
Option C: Interest rate remains fixed for the entire term
Interest rate structure (fixed or variable) is independent of whether a mortgage is table or interest-only. Both mortgage types can have fixed or variable rates. The rate structure depends on the specific loan terms negotiated, not the repayment method, making this option irrelevant to the comparison.
Option D: No deposit is required
Deposit requirements are determined by lender policies and loan-to-value ratios, not by the mortgage repayment structure. Both table and interest-only mortgages typically require deposits, with the amount depending on factors like borrower creditworthiness and property value. Neither mortgage type eliminates deposit requirements.
Deep Analysis of This Finance Question
This question tests understanding of fundamental mortgage structures and their impact on equity building. A table mortgage (also called principal and interest mortgage) requires payments that cover both interest charges and principal reduction, meaning the loan balance decreases over time. This contrasts with interest-only mortgages where payments only cover interest charges, leaving the principal unchanged. The distinction is crucial for real estate professionals as it affects client advice on wealth building strategies. Under New Zealand's regulatory framework, agents must understand these financial products to provide competent service. The equity-building advantage of table mortgages makes them attractive for long-term homeowners seeking to build wealth through property ownership, while interest-only loans might suit investors focused on cash flow or short-term ownership strategies.
Background Knowledge for Finance
Mortgage structures in New Zealand include table mortgages (principal and interest) and interest-only options. Table mortgages require payments covering both interest charges and principal reduction, gradually decreasing the loan balance. Interest-only mortgages only require interest payments, keeping the principal unchanged. Under the Real Estate Agents Act 2008, agents must understand these products to provide competent advice. The Property Law Act governs mortgage arrangements, while responsible lending practices require consideration of borrower circumstances. Equity building through principal repayment is a key wealth-building strategy for New Zealand homeowners.
Memory Technique
Think of TABLE mortgage as 'Taking A Bite of Loan Every payment' - each payment literally takes a bite out of the principal balance, like eating away at a table leg until it gets shorter. Interest-only is like just polishing the table - it looks maintained but never gets smaller.
When you see mortgage comparison questions, remember TABLE mortgages 'take bites' of principal (building equity), while interest-only mortgages just 'polish' (maintain) the debt without reducing it.
Exam Tip for Finance
Focus on the word 'advantage' and think about long-term wealth building. Table mortgages build equity automatically through forced principal repayment, while interest-only mortgages don't reduce the debt.
Real World Application in Finance
Sarah, a first-home buyer, chooses between a table mortgage at $2,500/month and interest-only at $1,800/month on a $500,000 home loan. While the interest-only option offers lower payments, her agent explains that the table mortgage builds $15,000 equity annually through principal repayment. After 10 years, Sarah would own $150,000 more of her home with the table mortgage, while the interest-only option leaves her debt unchanged at $500,000.
Common Mistakes to Avoid on Finance Questions
- •Confusing payment amounts with equity building benefits
- •Thinking interest rate type determines mortgage structure
- •Assuming deposit requirements vary by mortgage type
Related Topics & Key Terms
Key Terms:
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