A revolving credit mortgage is like an all-in-one bank account with a large overdraft facility. It lets you draw down a loan, put money in and take it out whenever you choose, provided you don’t borrow more than your limit. The interest is calculated daily, so you can use your income to reduce the loan balance for a while and save on interest.
As you can imagine, you need to be quite disciplined to make the most of a revolving credit mortgage. There’s always the temptation to go on a spending spree, instead of repaying your loan and reducing your regular interest payments.
If you read this article and think a revolving credit home loan could work well for you, it’s important to get independent advice before signing up. Our free find a mortgage adviser service can connect you to one of New Zealand’s best advisers. There’s no charge for their services either, because they’re paid by the lender you end up choosing.
How does the interest on a revolving credit mortgage work?
Revolving credit mortgages have a variable interest rate, which can go up or down with market rates. The interest rate at any time is usually the same as the standard floating or variable mortgage rate.
The interest is calculated daily, based on your account balance at the time. It’s then deducted fortnightly or monthly from the same mortgage account. That means you must have at least that much credit available, so you don’t exceed your total borrowing limit.
Revolving credit mortgages can reduce the overall interest you pay
Any money you pay into your revolving credit account will reduce the daily loan balance, and therefore the interest you pay. If your wages or salary payments are automatically paid in each time, they immediately reduce your loan by that full amount. This daily interest benefit keeps working, to a decreasing extent, as you gradually spend some of your income and make the regular interest payment. At your next pay day, the cycle starts again. Over the term of your mortgage this seemingly small advantage can add up to a significant benefit.
Using a credit card for most purchases and paying it off in full each month is a great way to keep your loan balance down for longer and further reduce the interest you pay.
Revolving credit mortgages with a decreasing limit
Combining a revolving credit mortgage with other types of loan
Many people choose to split their borrowing between a revolving credit home loan and a standard mortgage with a low fixed interest rate. This allows them to maximise the benefits of both types, while still having the added security of the fixed interest mortgage’s predictable repayments and steadily reducing balance.
A good mortgage for people with uneven income
A revolving credit mortgage can be ideal for freelancers, contractors, seasonal workers and other people with an irregular income. It’s a straightforward way to smooth out the ups and downs in your cash flow. Here’s why:
- The only repayments you have to cover are the fortnightly or monthly interest charges
- Whenever you earn money, you can use it to reduce the amount you owe, which will also reduce the interest charges
- For spending you can simply withdraw money, just as you would from an everyday bank account, up to your agreed limit
Revolving credit mortgage vs standard mortgage and a savings account
For those who are disciplined with money, a revolving credit mortgage can act as a very good savings account. Here’s why:
- If, in addition to your planned mortgage repayments, you put your savings into a revolving credit mortgage account, it effectively saves (earns) you interest at the variable mortgage rate. This is nearly always higher than the interest offered on a savings or term deposit account, particularly one that lets you withdraw your savings whenever you choose.
- The other big difference has to do with tax. The interest earned from a savings account is taxed as income, but the interest saved (avoided) by having the money in a revolving credit mortgage is not taxed.
For some people, however, having all their money in one big loan account makes it difficult to keep an eye on total spending and stay on track towards financial goals.
Revolving credit mortgage vs a car loan or personal loan for purchases
A revolving credit home loan lets you borrow up to your agreed limit whenever you want to. The main advantage it has over other loans are the interest rates. You’ll only be charged the variable mortgage rate, which is usually much less than you’d pay for a personal loan or retail finance, such as a car dealer loan. It will also be way less than the interest charged on a credit card balance after the interest-free period.
Another advantage of borrowing from the balance in your revolving credit mortgage is the chance to sidestep approval processes, paperwork and establishment fees. You simply spend the available money in the same way you would from an everyday account, using EFTPOS or internet banking. Obviously, this spending freedom can be dangerous if you’re not so good at setting a budget and sticking to it.
Revolving credit mortgage for planned renovations
If you’re planning to save up for renovations or home improvements, a revolving credit mortgage can be ideal. As your savings grow, they offset the amount you owe and reduce your interest payments. Then, as you work through your project, you can simply draw down money as needed up to your agreed limit. You can also stop repaying the money you owe for a while if you want to. Just be sure to budget for the increasing interest payments when you start to spend more from the account than you put in.
Clearly, a revolving credit mortgage can have big benefits for some people, but it’s probably not for everyone. Be sure to seek advice from a trusted mortgage broker or specialist. Their knowledge and experience can help you choose the best option for your circumstances.