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What is a revolving credit mortgage?

There are several different repayment structures available to help you pay off your home loan in the best way possible. You can even place some of your mortgage in one repayment structure and the rest in another. 

A revolving credit mortgage is a flexible mortgage structure that is something like an all-on-one bank account. You have a large overdraft, where your mortgage sits, and all your income and expenses go in and out of this single account. 

It is like an offset mortgage, although they differ slightly in terms of functionality, terms and availability. A flexi mortgage such as these loan types may help you to pay off your home loan faster, if the terms and conditions suit your financial habits and personality. 

Check out some of the characteristics of this loan structure to have your questions about a revolving credit mortgage explained. 

What are the benefits of a revolving credit mortgage?

A revolving credit is all about giving your options and freedom to pay the mortgage off faster. You have to maintain some self discipline though, so revolving credits are not usually appropriate for people who spend any money that they get access to. 

  • Use it to increase repayments without committing to higher repayments. A revolving credit gives you the ability to access funds as you wish but you only pay once the loan is drawn down. This has the added benefit of allowing for the dual strategy of paying your mortgage off faster with income going into the account and with you making optional lump sum repayments to the principal amount. 
  • There are certain people, such as freelancers, contractors and seasonal workers with an irregular income who benefit vastly from this simplified approach. It helps to smooth out the highs and lows of your cash flow.
  • You only need to pay off the interest every fortnight or month whilst anything additional that comes into your account reduces these repayments, or simply reduces your loan. Interest is calculated daily. 
  • When it comes to spending money, you simply withdraw as you would with your everyday account, up to an agreed limit.
  • As you’re charged a variable interest rate, you can find that consolidating other debts into a single revolving credit account will help you to save on interest. Mortgage rates are generally much lower than personal or car finance loans. 
  • For those of you looking to renovate your home, a flexible mortgage structure such as this one will enable you to have convenient access to your cash to get the jobs done without hassle. 
  • You can apply to set up a revolving credit in readiness for a property deposit – check with your banker or mortgage adviser for the rules of the day and under what conditions this will be allowed. 

Compared to putting your money in a savings account and earning interest, by only paying interest at a variable rate on your home loan you are effectively earning more. To put it in another way, the interest you earn in a savings account is generally less than the interest you avoid paying in a variable home loan. 

You also benefit from not being taxed on your savings as you otherwise would when it is added in a line of credit. Over the course of a few decades, this is definitely going to add up to saving you $1000s of dollars.

We can crunch the numbers for you and provide bespoke visual aids to make this all make a little more sense. Just get in touch with one of our advisors who would be more than happy to talk it through. 

Are there any pitfalls I should watch out for?

You might have guessed already what the biggest problem with such a flexi mortgage loan might be.  For some of us who are a little less disciplined with money, the temptation to continue spending can be all too much. It’s an easy habit to get into and tracking your spending is important especially for borrowers in relationships where money habits may differ. 

If you can’t control the impulse to spend…
a revolving credit mortgage structure could be a bad decision.

When you see a huge negative number on your everyday account, it takes a certain character to stay the course and not brush off a few extra hundred dollars here and there. Just because there is money available to spend, does not mean that you should spend it. You need to have a clearly defined budget when establishing this kind of repayment structure. 

When you max out your revolving credit you can fix and apply for another but it’s a dangerous habit to get into unless it’s strategic. 

As you are only expected to repay the interest on your loan, unless you decide to increase your repayments, you are not going to reduce the principal of your loan. You can establish a revolving credit with a decreasing limit, to help to pay off your principal, or you can combine one of these flexible mortgage structures with a more traditional table loan, benefiting from both fixed and variable mortgage rates.

Revolving credit mortgage rates are floating rates (variable rates) rather than a fixed-term, in New Zealand floating rates are normally higher than fixed rates. 

Who offers this type of repayment structure?

A revolving line of credit is available with all big banks here in New Zealand. As you need to combine your everyday and savings account into a single account for this to work, you may need to switch banks.

Whether you’re needing to therefore refinance an existing home loan, divide up your mortgages and split them between banks or change your bank to have a revolving mortgage as your home loan repayment structure, we can guide you through the process and set you up with the right people to get this done for you. 

Revolving credit mortgages are called different names at each bank: called a Choices Everyday Floating with Westpac, a Revolving Credit Home Loan with Kiwibank, ASB’s Orbit, BNZ’s Rapid Repay mortgage or a Home Equity Loan with HSBC, among others. 

You will be able to find relevant and company-specific information with your bank or non-bank lender.

Check out their revolving credit mortgage calculators and play around with different scenarios that you could be faced with to see what style of home loan repayments best suit you. 

Is a revolving mortgage right for me?

Be honest with yourself about how motivated you are to pay off your mortgage to start with, before deciding whether a revolving line of credit is the best way forward with your home loan. Many people choose to divide their loan between a repayment structure such as this one and a standard mortgage that has a low fixed interest rate. 

You can maximize the benefits of both loan types this way. With the added security of fixed interest and a steadily reducing mortgage,as well as the flexibility and reduced interest that comes with a variable rate, you can manage your money better. 

By taking a look at a revolving mortgage calculator, you can see whether the impacts that this loan structure will have on your short and long term finances are aligned with your goals. You can map out possible variable rate scenarios to see whether you are in a healthy position to repay your mortgage whilst keeping in mind the flexibility that interest-only repayments will have on your income and savings.We here at mortgagehq are always available to offer advice and education so that you can empower yourself with the knowledge and confidence that will get you mortgage free faster. Don’t be afraid to question your current situation and make changes that could see you achieving financial freedom before you thought was possible. 

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