A Revolving Credit is a type of home loan that works like a big overdraft. You can deposit money into this account type and take money back out as often as you like without incurring fees – so long as you stay within your approved limit.
This facility is different from a regular mortgage, as you’ll only pay interest on the amount outstanding (not the limit).
For example, if you have a portion of your mortgage set up as a revolving credit facility with a $100,000 limit loaded, and you deposited $20,000 into your revolving credit, then you’d pay interest on the remaining $80,000. You would also still be free to spend the $20,000 if you wanted to.
There are two types of revolving credit facilities:
- Reducing - these facilities have their limits reducing slowly over time (ie. 30-years), much like a normal mortgage where you make principal and interest repayments
- Non-reducing - the limit remains the same
Benefits of a revolving credit mortgage
- May help you pay your mortgage off faster – normal home loans limit the amount of extra repayments you can make and may also incur fees to make these extra repayments, whereas, revolving credits don’t. You can make as many extra payments as you like towards a revolving credit, which reduces your principal and amount of interest you’re charged
- Provides you with extra flexibility – normally when you make mortgage repayments, you’re unable to redraw these funds back, but with a revolving credit, you can deposit as much as you like and withdraw as often as you need.
- Lower interest rate than a normal overdraft facility – a bank overdraft is similar to a revolving credit, but they typically come with a much higher interest rate (sometimes as high as 20%)
- Only pay interest on money you’ve used
The drawbacks of a revolving credit mortgage
Revolving credit mortgages can be dangerous if you’re not disciplined, as you’re able to withdraw the money you deposit at any time, so it’s easy to spend the funds on other (more exciting) things.
Generally, revolving credits work best for those who can follow a strict budget and don’t overspend. If you’re likely to spend the money instead of saving it, a standard mortgage might work better for you.
Making a revolving credit mortgage work for you
Repay your mortgage faster?
If you’re wanting to look at ways to repay your mortgage faster, we recommend that you seek help from one of our experienced Mortgage Advisers.
