Which type of mortgage allows borrowers to make additional payments that can be re-borrowed later?
Correct Answer
C) Revolving credit mortgage
A revolving credit mortgage operates like a large overdraft facility where borrowers can make extra payments and then re-borrow those funds when needed. This provides flexibility for borrowers to access equity without refinancing.
Why This Is the Correct Answer
A revolving credit mortgage works like a secured overdraft: anything paid in reduces the balance, and the borrower can draw the same money again up to the approved limit.
Why the Other Options Are Wrong
Option A: Table mortgage
Extra payments on a table loan reduce the balance, but they cannot usually be drawn again without a new application.
Option B: Interest-only mortgage
An interest-only loan has no built-in redraw; extra payments simply reduce the balance.
Option D: Fixed-rate mortgage
A fixed rate describes the interest rate, and fixed loans often limit extra payments rather than allow redraws.
Deep Analysis of This Finance Question
This question tests understanding of different mortgage structures and their flexibility features. Revolving credit mortgages are sophisticated financial products that combine the security of property lending with the flexibility of overdraft facilities. Unlike traditional mortgages where payments reduce the principal permanently, revolving credit allows borrowers to access previously paid amounts. This flexibility is crucial in New Zealand's property market where borrowers often need to access equity for renovations, investments, or other purposes. The question distinguishes between static mortgage types (table, interest-only, fixed-rate) and dynamic credit facilities. Understanding these differences is essential for real estate agents as they directly impact client advice regarding property purchases and financing strategies. This knowledge helps agents guide clients toward appropriate lending products that match their financial goals and circumstances.
Background Knowledge for Finance
Mortgage types in New Zealand vary significantly in structure and flexibility. Table mortgages are traditional amortizing loans with fixed payments reducing principal over time. Interest-only mortgages defer principal payments, requiring only interest during specified periods. Fixed-rate mortgages maintain constant interest rates regardless of underlying structure. Revolving credit mortgages function as secured overdraft facilities, allowing borrowers to draw down and repay funds within approved limits. These products are regulated under the Credit Contracts and Consumer Finance Act 2003 and require appropriate disclosure. Real estate agents must understand these differences to provide informed guidance about financing options.
Memory Technique
Think of a revolving credit mortgage like a revolving door at a bank - money can go in (payments) and come back out (re-borrowing) through the same entrance. Unlike a regular door (table mortgage) where once you're through you can't go back, the revolving door lets you move in both directions freely within the building (credit limit).
When you see questions about re-borrowing or accessing previously paid amounts, visualize the revolving door. If the question mentions flexibility to access funds again, think 'revolving credit' - the only mortgage type that truly revolves like the door.
Exam Tip for Finance
Look for keywords like 're-borrow', 'access previously paid amounts', or 'overdraft facility' - these signal revolving credit mortgages. Other mortgage types are one-way: payments reduce the balance permanently without re-access capability.
Real World Application in Finance
Sarah owns a $800,000 home with a $400,000 revolving credit mortgage. She makes extra payments of $50,000, reducing her balance to $350,000. Six months later, she needs $30,000 for home renovations. Instead of applying for a new loan, she simply re-borrows $30,000 from her revolving credit facility, bringing her balance to $380,000. This flexibility allows immediate access to equity without refinancing costs or approval delays.
Common Mistakes to Avoid on Finance Questions
- •Confusing fixed-rate with payment structure flexibility
- •Thinking interest-only mortgages allow re-borrowing when no principal is being paid
- •Assuming all mortgage types offer the same flexibility features
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?
- → 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?
- → 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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