What is the main advantage of a table mortgage compared to an interest-only mortgage?
Correct Answer
D) The principal is gradually repaid, so equity builds 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
Each table payment includes some principal, so the balance falls and the owner's equity grows with every payment, unlike an interest-only loan, where the debt stays the same.
Why the Other Options Are Wrong
Option A: Lower monthly payments than interest-only throughout the whole loan term
Table payments include principal, so they are higher than interest-only payments on the same loan.
Option B: No deposit is required, because the lender is repaid more quickly
Deposit and LVR rules apply regardless of the repayment structure.
Option C: The interest rate stays fixed for the entire term of the loan
Whether a rate is fixed or floating is a separate choice; table loans can be on either.
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
On a $500,000 loan at 6%, interest-only payments are about $2,500 a month and the balance stays at $500,000. A 30-year table loan costs about $3,000 a month, but after ten years the balance is down to roughly $420,000, so the owner has built about $80,000 of equity from repayments alone.
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:
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 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?
- → What is the key difference between a table mortgage and an interest-only mortgage in terms of monthly payments?
- → 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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