Loan types
Principal & interest — the one that builds equity
Principal and interest (P&I) is the standard way to repay a mortgage. Every payment chips away at both the interest you owe and the amount you originally borrowed. Over time, you own more and more of your home until the loan is gone.
How it works
Each payment is split into two parts: interest (what the bank charges for lending you the money) and principal (the actual debt). Early on, most of your payment goes to interest. Over time, the balance flips — more goes to principal and less to interest.
On a 30-year loan of $600,000 at 6%, your fortnightly payment is about $1,650. In year one, roughly $1,380 of that is interest and $270 is principal. By year 15, it's closer to a 50/50 split. By year 25, most of each payment is knocking down the balance.
The standard term in New Zealand is 30 years, but you can choose shorter (20, 25) or longer (some banks go to 35). A shorter term means higher payments but much less interest paid overall.
Who it suits
- —Every owner-occupier. This is the standard structure banks expect for the home you live in.
- —First home buyers who want to build equity as quickly as possible
- —Anyone who wants a clear end date — the loan will be paid off in 30 years (or whatever term you choose)
- —People who value discipline — the structure forces you to pay it down
Pros and cons
Pros
- Builds equity with every single payment
- The loan has a defined end date
- Banks offer best rates for P&I owner-occupied loans
- Simple — everyone understands it
Cons
- Higher repayments than interest-only
- Less cashflow flexibility
- Early years feel slow — most of your payment is going to interest
- The 30-year default term means a lot of total interest paid
Tips to pay it off faster
Even small changes make a big difference over 30 years:
- —Pay fortnightly instead of monthly — you end up making 26 half-payments per year (equivalent to 13 monthly payments instead of 12)
- —Round up your payment — if it's $1,650 a fortnight, pay $1,700
- —Combine P&I with a small revolving credit portion for extra flexibility
- —When your fixed rate rolls off, keep paying the old (higher) amount even if the new rate is lower
Ready to start building equity?
Whether it's your first home or a refix, we'll structure your P&I loan to pay down as fast as your budget allows.
