Get debt-free faster
Save thousands and be mortgage-free years earlier simply by changing to a revolving credit mortgage, says Peter Norris.
8 March 2022
What if paying off your home loan faster didn’t have to feel like such a struggle? The end of that 30-year term seems so far away, and it is – but it doesn’t have to be.
Revolving credit mortgages – if used correctly – can help significantly reduce the term of your home loan and in doing so, save you thousands of dollars in interest.
Whether it’s owner-occupier debt or investment debt, the same rules apply.
I’ve seen companies like New Zealand Home Loans being hugely successful in showing clients how to get debt-free faster, based almost completely on using revolving credit mortgages.
What it is
A revolving credit mortgage works like a giant overdraft. This is where a lot of people get concerned, because the term ‘overdrawn’ is often considered a bad word in banking. However, an overdraft can be your friend.
With a revolving credit loan, one of your accounts has an ‘overdraft’ facility loaded against it. This amount, say $50,000, would then be set up as your transactional banking account where your income goes in, and your bills come out.
This means that every dollar you earn and all your savings are going into that mortgage every month, saving you ridiculous amounts of interest. It makes sense, right?
This is where your credit card can be your friend, as well. I know… this sounds crazy!
Credit cards all have a certain number of interest-free days. That means you can use that card for all your monthly spending, instead of taking it out of your account. That way the available balance of your revolving credit account goes up.
At the end of the month, a direct debit from your revolving credit facility pays off your credit card in full and you start again. Remember, it must be paid in full, so you’re never charged interest on it.
Because interest is calculated daily and charged monthly, every dollar in your account will help save you a significant amount of interest in the long run. Interest is far better in your pocket than the bank’s!
Any money you don’t spend within that month effectively acts as an extra payment towards your mortgage. This is likely to give you a lot more incentive to save than getting a measly 0.5 per cent in an interest-bearing bank account.
It works for investors, too
The same benefits can be had for a loan against an investment property.
Most property coaches and advisers will suggest you have your investment lending on interest-only, and I completely agree.
However, running a small revolving credit facility alongside your interest-only lending will help get that debt cleared faster as well.
Your rent gets paid into that account weekly and builds up your balance over the month – saving you interest and allowing you to get the benefit of paying down principal without feeling it in your pocket.
Easy emergency money
Investors would also be wise to have a revolving credit facility set up as a bit of an emergency fund.
The size of your portfolio will dictate how big that facility needs to be but regardless, having a slush fund should be part of your investment strategy.
Revolving credit accounts are easily accessible, which means you can use the available funds as soon as you need them.
So, what do the numbers look like?
Let’s say you have a revolving credit with a limit of $100,000 and you earn a monthly net household income of $10,000.
At the start of the month, the full limit is used. At the end of the month, your income of $10,000 has gone into the account and you’ve used your credit card for spending.
Your total monthly spending is $6,000, so that amount goes to paying off your credit card in full – so you get no interest charged.
Then $3000 goes to paying your other home loan payments (the rest of your mortgage).
The remaining $1000 then becomes your savings and stays in your account.
If you can maintain these habits, then this structure would have you clearing your debt almost 12 years earlier than expected, and save you over $70,000 in interest. Sounds worth it
Warning: Be smart with money
The risk with revolving credits comes back to your own behaviours with money. They can be hugely effective in helping you clear your debt faster, but you will need to maintain good habits.
If you’re someone who spends whatever you have around, and you’re likely to use your credit card and also all the available funds in your account, then a revolving credit isn’t for you – and a credit card probably isn’t a great idea either.
It will do more harm than good. However, if that’s you, then something like an ‘offset facility’ can work just as well.
In terms of the credit card, start with a small limit and only use it for some of your expenses while you get used to managing your money that way.
If it works, you can bump the limit up a bit and move more expenses to that.
Make it fun
Make paying off your mortgage a bit of a game, rather than seeing it as a burden.
Games are fun, and watching your mortgage come down faster than expected can be super-fun.
Structure your lending right without over complicating things and you’ll make an enormous difference to your long-term strategy, whether you’re an investor or homeowner.
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