How Revolving Credit Product Works: A Guide for Homeowners

Today, we’re diving into an essential topic for homeowners and prospective buyers: understanding how revolving credit products work. This type of mortgage can be a powerful tool in your financial arsenal, offering flexibility and potential savings if used correctly.

What is a Revolving Credit Product?

A revolving credit product, often referred to as a revolving credit facility or line of credit mortgage, allows you to borrow up to a pre-approved limit and pay interest only on the amount you use. Unlike a traditional home loan with fixed monthly payments, a revolving credit product gives you the flexibility to draw down and repay funds as needed.

Key Features and Benefits

1. Flexibility: You can access funds whenever you need them, making it ideal for managing variable expenses or taking advantage of investment opportunities.

2. Interest Savings: By depositing your salary and other income directly into the revolving credit account, you can reduce the daily balance and, consequently, the interest you pay. Essentially, your income works to lower your mortgage costs.

3. Ease of Access: Funds can typically be accessed using a debit card, online banking, or checks, similar to a standard transaction account.

4. Debt Management: You can consolidate other high-interest debts into your revolving credit facility, potentially reducing your overall interest payments and simplifying your finances.

How Does It Work?

Here’s a step-by-step look at how a revolving credit product operates:

1. Approval and Setup: You’re approved for a revolving credit facility with a set credit limit, similar to a credit card limit. This limit is usually based on a percentage of your home's value and your creditworthiness.

2. Using the Funds: You can withdraw funds up to your limit at any time. For instance, if you’re approved for $100,000 and withdraw $20,000, you’ll have $80,000 available.

3. Interest Calculation: Interest is calculated daily on the outstanding balance. If you deposit your salary into the account, the daily balance decreases, reducing the interest charged.

4. Repayments: There are no fixed repayment schedules. You can repay the principal at any time without penalties, which provides significant flexibility. However, regular repayments are advisable to manage debt effectively.

Is a Revolving Credit Product Right for You?

While revolving credit products offer significant advantages, they may not be suitable for everyone. Here are some considerations:

• Discipline Required: The flexibility can be a double-edged sword. Without disciplined spending and regular repayments, it’s easy to accumulate debt.

• Variable Interest Rates: Most revolving credit facilities have variable interest rates, which means your repayments could increase if rates rise.

• Long-Term Costs: If not managed well, you might end up paying more in interest over the long term compared to a fixed-term mortgage with structured repayments.

Tips for Effective Use

1. Budget Wisely: Track your spending and ensure you’re not using the facility for non-essential purchases.

2. Regular Deposits: Regularly deposit all your income into the account to minimise the balance and interest charges.

3. Consolidate Wisely: Use the facility to consolidate high-interest debts but avoid using it to fund ongoing discretionary expenses.

Conclusion

Revolving credit products can offer unparalleled flexibility and potential interest savings for savvy borrowers. However, they require disciplined financial management. As your mortgage adviser, I'm here to help you navigate these options and determine if a revolving credit product aligns with your financial goals.

Feel free to contact me if you have any questions or need personalised advice.