People that have used revolving credit facilities either have embraced the concept and have benefited financially, or have struggled to get any advantage from the concept and even gone backwards financially.
Many people do not understand how revolving credit facilities work and here we try to explain them in simple language so everyone can understand the concept and why it should help people pay their home loans off faster.
Here we look at revolving credit facilities, explain how they work, where to get advice on home loans and why it some cases they are not a good option.
What Is A Revolving Credit Mortgage?
A revolving credit mortgage is a flexible loan or overdraft secured over your property with a mortgage, The borrowers have a lot more flexibility than with a standard home loan. Like an overdraft you can pay off some of the loan and redraw it again through normal transactions using internet banking or other banking facilities.
The Same Facility By Another Name
A revolving credit mortgage is a type of home loan but a number of New Zealand banks have adopted specific names for their own revolving credit facilities. Some of the banks have created names to brand their product while others may be trying to hide the fact that they are actually revolving credit facilities.
Here is a list of the main New Zealand banks and what they call their revolving credit facilities;
|ANZ||Flexible Home Loan|
|Co-Operative Bank||Revolving Credit Facility|
|HSBC||Premier Home Equity Home Loan|
|Kiwibank||Revolving Credit Home Loan|
|SBS Bank||Flexi Loan|
These are the main New Zealand banks and their revolving credit facilities and by clicking the links you can review then further on the individual banks websites or you can CLICK HERE to check the current advertised interest rates.
How A Revolving Credit Facility Works
Very simply with a revolving credit mortgage (transnational mortgage) your interest is calculated daily on the outstanding balance. To make the most of your revolving credit facility you need to have any surplus or unspent money deposited into this account so that you are paying less interest.
Paying less interest means if you keep the same mortgage repayments then more of your money is applied to the principal repayment. Even little amounts can make a huge difference – initially the savings may seem very small; however with the cumulative effect over time the savings become quite significant.
The following is a list of characteristics common to most revolving credit facilities;
- Revolving credit facilities are transactional accounts with an overdraft limit.
- The borrower may use or withdraw funds up to a pre-approved credit limit. The credit may be used repeatedly (like a bank overdraft) without the requirement for any specific bank approval.
- The borrower makes payments based only their loan limit and in most cases only needs to pay the interest only on the amount they’ve actually used or withdrawn. Some revolving credit facilities have reducing limits which amortise (reduce) like a standard mortgage.
- The borrower may increase their repayments, deposit their wages and salaries directly or make lump-sum deposits to reduce the loan balance and therefore the interest charged.
- Some banks charge fees (account fees or higher interest rates) for the privilege of having a revolving credit facility.
The borrower is responsible to manage their own money and their bank accounts – including any revolving credit account.
Sometimes referred to as “revolting credit”…
Revolving credit mortgages got a bad reputation in the 1990’s when mortgage brokers decided to “sell” debt reduction systems. They charged a large fee of about $3,000 for this “magical” system that they demonstrated would pay your mortgage off faster without any additional money being required by you – the borrower.
Many people have experienced these types of home loans in the past and do not like them, or at least do not until they are explained and set up properly.
The over-riding principle is that you must earn, or be likely to receive, more than you spend, leaving you a monthly surplus. Assuming this is the case, then your monthly surplus becomes a repayment of loan principal, and this reduces the principal owing on your mortgage and the interest you are charged each month.
This also assumes that you do not see the available credit and decide to spend that money!
Understanding Why Revolving Credit Facilities Don’t Work
As mortgage brokers we often hear that revolving credit does not work.
In most cases when we hear this it is because those people have previously had a revolving credit facility and it hasn’t worked for them. This does not mean there is anything wrong with the type of home loan facility, it really means that it has not been operated properly.
The reality is lots of people do not have the discipline to manage a large revolving credit facility or overdraft – they tend to spend what money is available, not have any surplus income and/or decide to blame the revolving credit facility rather than look at how they manage money. This is a fact of life and not really a criticism of people – just a reality.
The problem is many of these facilities get set up as interest only and many borrowers who do not understand how these loans worked are not disciplined and therefore they often can spend years paying their home loans and never reduced the loan at all.
Furthermore many people have been told to put all of their everyday spending on credit cards to get the period of “free credit” which most people find makes it hard to manage any budget.
Find Out From A Mortgage Broker
Many mortgage brokers and bank staff do not explain very well how revolving credit facilities work, or more importantly why they often do not work.
If you take the human nature (the people) out of the equation then technically a revolving credit facility does work, but there is a human element that cannot be removed. People need to understand this and decide for themselves if they will be able to be disciplined enough and for this reason many people will only have a very small portion of their home loan structured as a revolving credit facility.
A mortgage broker will tell you why a revolving credit facilities can work better than a conventional mortgage.
People use these types of facilities to help pay off home loans sooner, and they do work well when set up properly and managed properly.
Many bank staff have learned the concept from a text book and know that it works; however they fail to factor in that in life people have challenges, wants and needs and therefore there is a ‘human nature’ that can upset what seems logical to some. Take the time to understand the concept and find a mortgage broker that you feel comfortable with and they will explain the concept and discuss the pro’s and con’s with you.
Take the time to really understand how a revolving credit facility works.