Revolving credit mortgage NZ: how it works, and when an offset is better

How home loan revolving credit works

First, the bank sets a limit, say $30,000. Like the rest of the mortgage, it is secured against your home. You can draw up to that limit whenever you like, and repay it whenever you like. There’s no fixed repayment schedule in the usual sense. Instead, the bank expects the balance to stay inside the limit. For some loans, it also expects the balance to fall over time.

The bank works out interest on the daily balance and charges it monthly. Here’s a quick example. You owe $20,000. Your $4,000 pay lands on the 1st, so for the next fortnight you pay interest on roughly $16,000, not $20,000. Then, as bills and groceries come out, the balance creeps back up. Over a year, that difference adds up. This is especially true if you also park your savings in the account, rather than in a savings account earning taxed interest.

However, the rate is the bank’s floating rate, which is normally higher than its fixed rates. That’s the trade-off you make for the flexibility.

Revolving credit vs offset mortgage

People mix these up all the time, and some banks offer both. The difference is where your money sits.

If you like watching your savings grow in their own account, an offset mortgage is easier to live with. On the other hand, if you want one account that does everything, revolving credit is simpler. It does take discipline, though. In cost terms, the two are close. Also, which lenders offer which option changes over time. So check before you assume your bank has it.

How big should your revolving credit mortgage be?

This is where most of the money is won or lost. If the limit is too small, you can’t fit your pay and buffer in it. If it is too large, part of your mortgage sits on the floating rate when it could be fixed for less.

Here’s a rough rule I use with clients. Set the limit at about one month of household income. Then add whatever emergency fund you’d otherwise keep in savings. For example, a couple bringing home $10,000 a month with a $15,000 buffer would have a limit of around $25,000. The rest of the loan goes on fixed terms.

A few things push the limit up:

• Irregular income. If you’re self-employed or on commission, a bigger buffer smooths out slow months.
• A known lump sum coming. Bonuses, an inheritance or a property sale can be dropped in to cut interest straight away.
• Plans to go down to one income, for a new baby or study. Paying ahead now gives you room to draw back later without asking the bank.

Why revolving credit got called “revolting credit”

When banks first rolled these out, some people moved their whole mortgage onto one huge revolving credit account. The theory was sound. In practice, though, a $500,000 limit with no compulsory repayment meant many balances never went down. Those borrowers then paid the floating rate on all of it for years.

The fix is boring. Keep the revolving portion small, fix the rest, and check the balance every month. If it isn’t lower than a year ago, the account is funding your lifestyle rather than paying off the house.

Is home loan revolving credit right for you?

It tends to work well if:

• You have savings sitting in the bank that could be working harder.
• You track your spending and don’t treat available credit as money to spend.
• You want to pay extra some months and less in others without asking the bank each time.

However, it’s a poor fit if you’ve struggled with credit card debt. The same goes if you’re already stretching to make the minimum repayments. In that case, a plain loan with automatic repayments does the job with less temptation. If you’re carrying other debts, debt consolidation might be the better first step.

Getting the most from it

1. Have your whole salary paid straight into the revolving account.
2. Put regular spending on a credit card you clear in full each month from the revolving account. Your money stays in the loan for an extra few weeks.
3. Set a target balance for each year and check it on the anniversary.
4. Review the limit whenever a fixed term rolls off. The fixed or floating guide covers how to think about that decision.
5. Ask the bank to reduce the limit as you go. A lower limit means less temptation.

The repayment calculator shows what the fixed portions will cost each week. That tells you what’s left to work with in the revolving account.

Common questions

Revolving credit is one of six ways to pay your mortgage off sooner. The rest are in how to pay off your mortgage faster.

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This article is general information only and isn’t personalised financial advice. Examples are illustrative. Mortgage Sense is a trading name of Yatin Kainth, a Financial Adviser (FSP1007497) providing advice under the Mortgage Managers licence (North West Group Holdings Ltd, FSP682791). See the Disclosure Statement.