Are you good with money? Can you stick to a budget? Are you building or renovating? If you’ve answered yes to any of these questions, you might want to consider a ‘revolving credit’ mortgage.
A revolving credit loan acts like an overdraft, and your revolving credit mortgage becomes your ‘everyday' account, so money flows in and out of it as you spend. How much interest you pay depends on the negative balance in the account, and what the bank’s floating interest rates are.
You can make repayments as often as you like, for as much as you like (instead of being locked into set amounts), and you can withdraw money if you need it, up to your credit limit.
The revolving credit balance needs to be as low as possible to make revolving credit worthwhile regarding interest savings. You do this by keeping as much money as possible in the account for as long as you can. To help with this people sometimes use their credit card for day-to-day spending, and pay it off monthly from their revolving credit facility. Doing this ensures that after their entire salary goes onto the mortgage each payday - using a credit card keeps the balance lower for longer on the revolving credit loan.
Revolving credit offers unique benefits that other mortgages don’t:
- The faster you get your overdraft balance to zero, the faster you can re-draw the available funds to make a lump sum payment towards the principal off any fixed-rate loans you hold, before starting the process again. The best thing to do is time these lump sum payments in line with re-fixing your rate to avoid any penalties
- It can provide a good ‘rainy day buffer’ when emergencies happen
- With the ability to redraw funds up to the limit, you can use the revolving credit for business purposes, home improvements or even a deposit on a rental property, without having to apply for more money from the bank
As lending criteria tightens, it’s good to be aware that banks are reducing access to revolving credit loans, and the size of the limit available, particularly if you have equity of less than 20%.
If you’re interested in a revolving credit loan, get in touch for more advice, or speak to your financial adviser to find the best way of making it work for you.