Understanding Revolving Credit Mortgages

A revolving credit mortgage is one big account that all transactions pass through i.e. your income, savings, expense payments and mortgage payments are all handled from one account. Think of one big overdraft account for everything to go into. You only pay interest on the balance of the account each day when interest is calculated. The idea being that the positive balances in the account reduce the amount of principal you pay interest on.

How does a revolving credit mortgage work?

Generally a revolving credit mortgage is based on a floating interest rate and does not have a fixed term. In this case the credit is revolving as you can borrow and repay the funds over and over. The account offers a lot of flexibility as you can make lump sum payments i.e. if you got a bonus you may choose to put that whole sum into your revolving credit account and hence immediately pay that amount off your mortgage, with no penalty for making an extra payment. Conversely, if you wanted to withdraw a $4,000 to buy a cheap car you have immediate access to those funds up to your credit limit.

Note: A revolving credit mortgage does not have set repayment amounts on a set date. You can make payments at any time for as much as you like, conversely you can withdraw funds up to your limit whenever you like. You pay interest on your outstanding balance, which is calculated daily. Interest is deducted usually fortnightly or monthly from your revolving credit account, meaning you must have sufficient credit available in your account so you don't exceed your limit.

Tip: Using your credit card for all expenses and paying it off in full each month is a great way to keep your revolving credit account balance down minimise your interest payments.

What are the Pros and Cons?

Pros

• Ability to reduce your mortgage expense by lowering your principal.
• Ability to redraw credit multiple times.
• Not charged for extra repayments
• May suit irregular income earners

Cons

• With funds easily available you may be tempted to draw down when you can't afford it
• The savings accounts money you put into the revolving credit account are not earning interest.
• You cannot lock in a fixed rate as revolving credit accounts are usually based on floating rates.
• It can be difficult to track where you are at i.e. there is not a separate savings account that you can watch grow, everything is all together in one big account.

Who should use a revolving credit mortgage?

This type of account is best suited to people who have good discipline with their money management. Funds are easily available for purchases up to your credit limit, so you'd need to be careful opting for this account if money tends to burn a whole in your pocket. It can be confusing trying to understand where you mortgage is at i.e. how much progress you've made paying it off. Funds come in and out constantly which makes benchmarking difficult.

A similar product to a revolving credit account is an offset mortgage, it offers similar advantages but with less financial management required. You can read about offset mortgages here.