If you’re in the market for a mortgage, you may have heard the words ‘revolving credit’. But what does it actually mean – and, more importantly, is it something that would work for you?
First, the basics. What’s a revolving credit, anyway?
Depending on your situation, a revolving credit can be an effective way to structure your mortgage. It works like this: instead of having your home loan separate from your transactional banking account, and just paying what you owe each month, you carve a bit of your mortgage off to be your ‘revolving credit’ facility.
This might be $25,000, $50,000, $100,000… whatever you think is a manageable amount to pay off over the next few years.
Then that amount becomes a bit like a big overdraft, sitting on your transactional account.
Each time you’re paid, your money goes into that account and sits there, where it offsets the loan amount that is incurring interest. Because interest is calculated daily, the more days you have your money in there, the better. You then pay your bills and do all your spending on your credit card during the month to allow the money to accumulate.
At the end of each month, you pay off your credit card and hopefully have a bit left over in the account to reduce your outstanding loan balance. Then rinse and repeat each month until the ‘overdraft’ is gone.
When is revolving credit a good idea?
Revolving credit can be a very effective way to pay off a mortgage faster if you’re disciplined. As well as the interest saving you get from having your income sitting in your account, offsetting the loan for the month, it gives you the freedom to throw as much money as you can at your loan, knowing that you can easily redraw it if need be. There are no fees associated with lump sum payments, you just stick your money there and forget about it.
If you manage it well, your revolving credit could slash years off your mortgage and save you tens of thousands of dollars in interest costs. But if you’re not so disciplined, it’s less effective.
Is revolving credit for you? Let’s talk
Revolving credit facilities usually have interest rates that are similar, or the same as, the bank’s floating rate – at the moment about two percentage points higher than short-term fixed rates.
If you’re not getting anywhere near paying off the amount you owe, you may find you just end up paying a higher interest rate for the privilege of having a revolving credit facility.
If you’re the type of person to save up a few thousand dollars and then be overwhelmed with the temptation to splash out, you might also need to think twice. In that case, you probably need a mortgage structure that makes it a little harder to redraw money you’ve paid off your loan.
We can help. Mortgage advisers can help you run through the options to determine the best structure for you, and the most effective way to get you debt-free faster.
Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek specialist advice.