- May 12, 2024
- Posted by: legaleseblogger
- Category: Related News
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## Exploring the Concept of Revolving Credit in Mortgages
We are currently in the process of applying for mortgages, and it seems that every broker we speak to highlights the benefits of revolving credit. This feature allows for the mortgage to be split into a fixed-rate portion and a variable rate portion, with the bulk of the mortgage being in the former. The variable rate portion, while higher floating rate, can be paid back at any time, making it an appealing option for those looking to accelerate their repayment.
One question that arises is whether mortgages with this revolving credit feature are more expensive compared to those without it. Is it possible to secure a lower fixed rate with a lender that does not offer revolving credit, or even negotiate a lower fixed rate with the same lender?
The current scenario sees floating rates approximately 1% higher than fixed rates, while savings rates are significantly lower. In this context, the idea of revolving credit being essentially “free” holds some weight, as it may not be financially advantageous to opt for a lower fixed rate without this feature.
Despite the benefits, there is a certain level of skepticism surrounding the concept of revolving credit. While the ability to pay back the variable rate portion faster sounds appealing, some may argue that it is more beneficial to borrow the entire amount at the lower fixed rate, overpay slightly to the limit, and make a lump sum payment at the next refinancing opportunity.
The notion of banks potentially penalizing individuals for overpaying by imposing higher interest rates on additional repayments raises concerns. It seems contradictory to discourage overpayment, only to later encourage it by charging more interest.
In this complex landscape of mortgage options, AI Legalese Decoder can help navigate the intricate legal language and terms associated with revolving credit mortgages. By utilizing this tool, individuals can gain a clearer understanding of their mortgage agreements and make informed decisions regarding the best repayment strategy for their financial goals.
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>are mortgages with this feature more expensive than ones without?
I don’t think so, rates vary only slightly between banks, but I don’t think they’d take having a revolving credit facility in to account in these. What is more expensive, is if you make use of the revolving credit but don’t make meaningful progress towards paying off the chunk in revolving each year.
We’ve made use of a revolving credit account and it’s helped us set a goal for over-payment each year. Here’s what we did:
We put a chunk of our mortgage against our main bank account where all pay comes in, and all payments go out. One of these payments is a credit card which we put every expense on we can, and pay off in full each month. This keeps the revolving account balance as high as possible for as long as possible, minimising interest paid (which is a bit of a micro optimisation, but an optimisation none the less).
Each year we had at least 1 chunk of the mortgage in 1 year fixed, so that at the end of the year we could draw the revolving back down to its limit before refixing, essentially setting our new overpaying target for the year.
You can think of it like this, if the revolving account balance returns to 0 by the end of the year, you’ve paid roughly 50% of the floating rate in interest compared to having it fixed. It’s worked well for us, YMMV 🙂
Here’s a graph I made the other day that illustrates it: [https://i.imgur.com/sr4zTBj.png](https://i.imgur.com/sr4zTBj.png)
I found it valuable as we could pay off our mortgage faster and one I payed off the revolving credit, it could be used as a loan for things that happen unexpectedly like having to buy a new car. If you plan on having long term fixed rates then you have to wait a long time to do a bulk payment imo
I love having a flexible component that I can smash down as fast as possible. It only costs 1% more in interest for the flexible part of the mortgage. It’s so much better to pay off your mortgage than having money in bank deposits. Firstly the rate of your mortgage is higher than the rate your deposit gets. Secondly you pay tax on the interest earned on a deposit. It works out about twice as good to pay down your mortgage than have it in a deposit instead.
There is an account fee of about $12 a month for me on my flexible mortgage account.
I’ll have paid off my $250k mortgage by the end of this year. Only 3 years after getting my first home.
They can work well but it depends on how good you are with money.
If you are a saver then you can repay debt potentially much faster and if you earn bonus or commission income they can be particularly useful in getting rid of debt with these lump sums.
If you are more of a spender, I definitely wouldn’t recommend it. All too often I see people with revolving credit facilities that are maxed out and they never really work on repaying down the debt, simply as it’s too easy to spend money. They end up switching the loan to a fixed/table loan to ensure that there is no redraw facility available to get the debt down.
We have an offset rather than revolving credit, but the difference between them is marginal in our usage (we had revolving credit before changing bank). We use part of it as our emergency fund, so there’s no interest paid but the safety option always there.
Used to work as a contractor and set the tax payment to twice a year so I can use the tax/gst money to offset the interests for the better half of the year!
It depends on your circumstances, but it works out to be a good thing for us. For the same repayment, we’re paying off about $2k a year more with the offset, compared to our fixed rate options.
We have revolving credit account, and have used it effectively for many years
Our emergency funds + tax savings etc are ~$50k.
Whether using an offset or revolving credit, makes a lot of sense to use that money to reduce interest.
We know that things can happen; like losing our jobs in 2020, or expensive repairs for house/car/rentals etc, so having a lot of credit available (I think we have ~$150k we have not drawn down) at no extra cost compared with non-revolving makes sense for us.
As we are not currently using the revolving credit amount, we could in theory reduce it, but for us having the money available is not an issue.
If you are the sort of people who look at an account and see $100k available credit, and tempted to go ahead and book that holiday, test drive a new Tesla, boat or something, then revolving credit is not for you
If you have good income, get a revolving line of credit and throw all your savings and earnings into it. Even if the interest rate is 8%, it will definitely be less over the course of the year. It’ll allow you to pay down the mortgage while saving on interest. Then you can re use the money to pay down the next refixing and do it all over again.
Plus you’ll have access to cash whenever you need it and you just pay interest on the outstanding amount. I added 100K revolving to mine.
Apologies to hijack ever so slightly, for those using the revolving credit facility to do lump sums each re-fix.. what is your game plan with the fixed portion payments, do you pay the minimum payments on the fixed portion and direct everything else into the revolving?
We have a bit of extra cash over the next re-fix year and are going to open a revolving. Unsure whether to up the repayments on fixed alongside smashing the revolving. Or just go hundy on the revolving.
Has anyone done the math if there is any interest savings either way? TIA
In a perfect world you will have no cash flow issues and life will be perfect with no urgent bills.
We use it quite often but you have to be disciplined to pay it back on time.
Assuming you don’t just increase your fixed repayments (by reducing your term), because in my opinion this removes a lot of essential risk reduction planning potential, your two scenarios are effectively:
1) Start with revolving credit account in debt and slowly pay this off through the year
2) Put your savings into a savings account (for ease of use I’ll pick an on-call account since trying to manage term deposits with regular savings is quite complex) and then paying this off annually (assuming 1 year fixed rate).
For argument’s sake let’s say the following:
* 1yr fixed rate is 6.8%
* floating revolving credit rate is 8.64% (ANZ’s current)
* Money saved would otherwise be going into an on-call account at a rate of 5.25% (Squirrel Money rate) less 33% tax rate ~ 3.52%
$100/month put into the on-call account compounding for a year would give a return of ~1.93% or $23.11 after-tax. During this time your $1200 fixed at 6.8% has accrued $81.60 of interest, so net balance of -$58.49 (loss)
Conversely if you had a revolving credit account with a starting balance of -$1200 the final balance at the end of the year would be about -$46.50 (loss).
The revolving credit account has accrued less interest than the alternative (~20% less interest using these numbers).
https://fastupload.io/2f9UlUR5CqyTFGN/file
One last thing to consider is that whatever your bank charges for a revolving credit account.
We have a revolving credit, but I’m still not sure how exactly to make the most of it to reduce our overall mortgage payments. Maybe someone can help me understand given this simple example.
I have a $500,000 fixed mortgage, and a $100,000 revolving credit, which is currently paid off.
My larger mortgage is coming up for renewal. Should I put the $100,000 straight into the larger mortgage, reducing the mortgage to $400,000?
This now means I owe $100,000 on the revolving again, which I’ll be paying the floating rate. Is this the right strategy?
We have a mortgage split in 3 (12m, 18m and 24m) plus a revolving credit of $20k. I wish we made the revolving credit more as we got to $0 faster than I expected and now cant offset more interest until our 12m is up for refix!
You’ll get the same fixed rate with or without revolving facility.
A revolving facility is granting you flexibility. If you are certain that you’ll save X amount into the revolving facility each month to pay off Y by the end of the year, you’d be better off just having larger fixed repayments by reducing the length of the mortgage.
I’ve got a private (non-bank) mortgage where I can pay back as much as I like, as long as I meet the minimum to cover the interest and that my payments are on the same fortnightly date. Therefore my obligation is interest-only, but I can overpay as much as I want to pay it down faster.
Would there any reason for me to move to a revolving credit facility? Or am I already getting the repayment flexibility that a revolving credit provides?
Right, I though I would get it this time but sadly, I still haven’t! The brain hurts!
Can someone ELI5? Maybe a simple visual graphic video explainer. I watched a BNZ one and was still none the wiser.
Found this: [https://www.youtube.com/watch?v=vClYijE-ESc](https://www.youtube.com/watch?v=vClYijE-ESc) and this: [https://www.youtube.com/watch?v=nDm7iwKdoPI](https://www.youtube.com/watch?v=nDm7iwKdoPI)
But still not sure how this helps save money and pay the mortgage off faster.
TIA
ETA: Also, in this era of high(er) savings interest rates, how does the revolving credit help?
Offset account works better