Is your revolving credit working for you?

Most people will have heard of a Revolving Credit or Flexi Mortgage as some banks call it. It’s basically like a big overdraft with a set limit, at floating mortgage rates. Though some banks do have a reducing limit option or prefer it to be a reducing limit. A Revolving Credit can sometimes come with a monthly fee depending on the bank, and restrictions on how big a limit you can have. 

It tends to work as a transaction account with the idea that more money goes in than comes out every month. So as interest is calculated daily, the goal is having as much money as possible credited in to keep the balance low before expenses/interest/other loan payments go out. 

Usually, it will have a negative balance so if more money goes in than goes out every month, the balance owing starts to drop, and you are paying off a chunk of mortgage quicker. You get the flexibility of making extra payments to save on mortgage interest. 

The other big benefit of course is still being able to redraw up to the limit if you need to access surplus funds you have paid down into the account. This is where borrowers sometimes come unstuck and if you are not disciplined, the negative balance can fluctuate back up to the limit without ever really being paid off. 

Some borrowers will hover around the zero balance every month and know they have access to available credit in times of emergency. Again, this requires discipline but is helpful as a financial back up in times of adversity or short-term needs eg. Holiday you know you can pay off quickly or paying for a set of tyres for your car. 

Revolving Credits can work well for those with large surplus income. It can also be a great mechanism to pay down lump sum chunks on your fixed mortgage. 

For example, lets imagine you had a $50,000 limit on a Revolving Credit, and zero balance, with a fixed rate due to expire. You budgeted to be able to save at least $30,000 over the next 12 months on top of all other expenses. So rather than get tiny interest in a savings account, you take $30,000 out of the Revolving Credit and make a lump sum payment on the fixed rate loan (then refixed it for say a year). You still have access to $20,000 plus for emergencies being the difference between the balance and $50,000 limit. 

You then pay that minus $30,000 balance down to zero over the next year with monthly surplus’s (i.e. more money going in than going out on average). Ideally in a year, the balance is zero again with the fixed loan up for review that you fixed a year ago. You budget you can save another $30,000 over the next year, so you take $30,000 out of the Revolving Credit, make the lump sum payment again on the fixed loan, set it at a new fixed rate for say a year and start the process again. That’s two lump sum payments you have been able to achieve on the fixed rate loan within a couple of years. Depending on what rates do, that then in theory lowers the regular payments on the fixed rate loan and potentially gives you more surplus every month on the Revolving Credit. 

In simple terms, you are ‘saving’ lump sum payments via the Revolving Credit and essentially using the floating rate for more flexibility on paying off the mortgage faster.

Of course, there are other products such as the Offset floating loan where saving the lump sum in a savings account, linked to an Offset loan, rather than using a Revolving Credit is also effective. But not all banks offer the Offset product. 

If you find you always have a large negative balance in your Revolving Credit every month, it may pay to break off that average negative portion and put it on a fixed rate to pay it down quicker. That would mean reducing (or removing) the Revolving Credit limit accordingly. 

We have a handy budgeting tool on the Craig Pope Financial website to check what sort of surplus per month you could aim for. 

For any questions about Revolving Credits, please contact your local Mortgage Adviser Craig Pope.