Revolving credit mortgages are flexible loans like an overdraft which is secured over your property.
Our mortgage experts discuss how to get the best from a revolving credit mortgage.
What Is A Revolving Credit Mortgage?
The borrowers (like you) often want to have more flexibility than with a standard home loan and this is where evolving credit mortgage really work well.
Like an overdraft revolving credit mortgages are transactional accounts with a loan limit.
This means you can use money (borrow money) up to the approved limit when required, but you are only charged interest on the amount that you borrow on any particular day. This way when you pay extra money into your account you reduce the balance owing and therefore reduce the amount of interest that you will pay.
They work very well when you are able to pay extra off or have periods of the month when you can leave money in your revolving credit account.
There are three things that you need to understand;
- Higher floating interest rates – when you compare home loan interest rates you will see that the revolving credit loans always use the higher floating interest rates. This is why some people do not recommend these types of loans; however you should consider the total cost of your interest not the actual rate. see below – Why Revolving Credit Mortgages Might Be A Smarter Way
- Watch out for fees – most banks will also charge a monthly account fee with these types of accounts, but our mortgage experts can show you some options with no fees.
- Interest only – often a revolving credit mortgage will be an interest only loan leaving you to manage the principal repayments on your own. Some banks have the option of a reducing limit on the revolving credit loan which makes it a principal and interest loan.
But they can work very well, and that’s why many mortgage experts recommend using them.
Why Revolving Credit Mortgages Might Be A Smarter Way
As mentioned above they work very well when you are able to pay extra off or have periods of the month when you can leave money in your revolving credit account.
Like a snowball rolling down a mountain, the savings grow over time.
Consider this;
- You have a $10,000 loan
- You could fix the loan of $10,000 at ‘say’ 3.55% and over the year you would pay $355 in interest if interest only
- Or you could use a higher interest rate of 5.15% on a revolving credit loan. But assuming that your average loan account balance was ‘say’ $6,000 then you would pay $309
It really works well if you use the account at an average which is below the loan limit.
(Rates used were the Kiwibank home loan rates advertised on 4/11/2019)
Some people are critical of revolving credit, but it’s typically an issue with how they were set up or how they are used.
There are some other benefits too.
Pay Your Mortgage Off Faster
You will find that most mortgage reduction programmes will include the use of a revolving credit mortgage for at least a small portion of the overall lending.
Systems like Eat My Mortgage use loan structures that includes a revolving credit loan so you can control your repayments and pay your mortgage off faster. They encourage you to increase your repayments through the use of a revolving credit account where you retain control.
You can increase your regular repayments to match your pay cycle, or can add lump-sums as finances allow.
Revolving credit mortgages offer extra control so that you can build a back-stop to cover periods when finances might be tight such as when starting a family, starting a business or dealing with redundancy etc.
One key is not to have a limit that is too big.
