Revolving Credit Mortgages 101

With a revolving credit mortgage, you can potentially pay off your mortgage years earlier and save many thousands of dollars in the process. A note of caution, though: this mortgage structure is only effective if you’re disciplined and use it wisely…

WHAT IS A REVOLVING CREDIT MORTGAGE?

A revolving credit mortgage is a flexible home loan option that works similarly to a large overdraft. Instead of having the standard term loan where you make fixed repayments to the loan account, your salary (and any other income you earn) goes directly into your loan account as soon as you receive it, thereby reducing your loan principal when that income hits the account.

And because mortgage interest is calculated daily, having more money in the account for longer reduces the overall interest charged. Likewise, if you manage your expenses strategically, the account stays fuller for longer which further reduces the interest you’ll pay.

You can also withdraw funds up to your approved limit when needed, making it a highly adaptable financial tool.

COULD A REVOLVING CREDIT MORTGAGE BE FOR YOU?

A revolving credit mortgage is particularly beneficial for homeowners who:

• Have a high and stable income and consistently pay down their mortgage.

• Want to minimise interest by keeping their mortgage balance as low as possible.

• Are disciplined with budgeting and financial management.

• Would like the flexibility to access funds without having to apply for new loans.

Advantages of a Revolving Credit Mortgage

• Interest Savings: Since interest is calculated daily, keeping more money in the account reduces the overall interest charged.

• Financial Flexibility: Borrowers can access funds as needed without needing to reapply for a loan.

• Potential to Pay Off the Loan Faster: If you keep your balance low, you can reduce your mortgage term.

• Works Well with Lump Sum Payments: If you receive irregular income or bonuses, you can apply these directly to your mortgage to reduce interest.

Drawbacks to Consider

• Requires Financial Discipline: Without careful management, the flexibility can lead to increased borrowing instead of reducing debt.

• Not Suitable for Everyone: If you struggle with budgeting or tend to spend available funds, a revolving credit mortgage may not be the best choice.

• Higher Interest Rates: These mortgages sometimes have slightly higher interest rates compared to traditional term loans.
  

MIXING REVOLVING CREDIT WITH A FIXED RATE LOAN

A revolving credit account doesn’t have to be 100% of your mortgage. We often recommend to WealthHealth clients to mix and match by splitting their mortgage – putting some of the mortgage amount on a revolving credit facility, with the rest being a standard fixed-rate home loan.

This allows you to benefit from the flexibility of revolving credit, while also securing the lower interest rates typically associated with fixed-rate loans.

Benefits of a Split Loan Structure

• Lower Interest Costs: Fixed-rate home loans generally have lower interest rates compared to revolving credit accounts. By splitting your mortgage between the two structures, you can take advantage of these lower rates while still retaining some flexibility.

• Financial Stability: A portion of your mortgage remains on a fixed rate, providing certainty over repayments, which can help with budgeting.

• Flexibility Where You Need It: You can use the revolving credit portion to manage cash flow and make lump sum repayments, while the fixed portion remains steady.
  

Revolving Credit mortgages are ideal for financially-disciplined individuals looking for flexibility (and interest savings!). However, they require careful management – so may not be the best fit for those who struggle with their spending habits.

Considering a revolving credit mortgage or a split loan structure?
Get in touch with the WealthHealth mortgage broker team
– we’ll help you assess which mortgage structure is right for you.

Our blog is not intended to be taken as personal advice and is for informational purposes only.
Before acting on this information, contact our mortgage broker to ensure it is suitable for your circumstances.