Fixed rate vs revolving credit

How to cut your home-loan term in half

As a homeowner, you’ll know getting a mortgage isn’t a set-and-forget deal. Depending on how your home loan is structured, you’ll more than likely review it every year or two. Perhaps you’re in a position now where you’re about to re-fix, or you’re considering an upgrade or renovation. Either way, it’s a great chance to review your mortgage and consider your options.

Fixed-rate loans and revolving credit are two very acceptable mortgage structure options. Here, we’ll discuss the difference between them, their advantages and disadvantages, whether revolving credit is a good option for you, and how you can use it to pay off your mortgage quicker.

Fixed interest-rate loans and their benefits

With fixed-rate loans, you pay a fixed interest rate for a set period – usually six months to five years.

Fixed rates are good because you know exactly how much interest will be charged over the term – and therefore how much of your mortgage you’ll be paying off each month. If interest rates are rising, they allow you to lock in a lower rate for longer. Lenders will often compete for customers by offering great fixed-rate specials, so you can shop around for the best deal.

While fixed-rate home loans provide security, they’re limited on flexibility. Once a rate is set, there’s no changing it until the term is up (meaning you can’t take advantage of lower interest rates if the market drops). There are often additional fees associated with making extra mortgage repayments, too.

Revolving-credit loans and their benefits

Revolving credit works just like an overdraft. This means you can essentially make repayments to your mortgage as often as you wish, and withdraw money when you need it. The interest rate is calculated daily, so the aim should be to keep the loan as low as possible. That’s why if you’re considering revolving credit, you need to be disciplined. Otherwise you may find yourself spending more than you should, thereby adding to your debt.

Fixed and floating – the magic combination

With focus and attention, revolving credit combined with a fixed mortgage can be a great way to pay off your home loan in record time. Here’s how:

• Have an expert broker split your loan between fixed and revolving.
• Have all your income paid into your revolving credit account and add any windfalls – even small amounts of money can bring down your interest. You’re paying off more of your loan balance, which means even less interest in the future.
• Make a budget, so you know you’re not overspending. Make a list of all your income and expenses, including your weekly minimum mortgage repayments – and don’t forget those less frequent bills you pay quarterly or yearly.
• Next, use a credit card for all your day-to-day expenses. Crucially, you need to set up a debit so the card balance is paid in full each month from your revolving credit. This means you get 30 days without paying any interest on either your card or your revolving credit. You’ll also have the advantage of credit card extras like Airpoints or cashback.
• Ask your broker to review and restructure your mortgage regularly – you’ll generally pay higher interest on revolving credit, so you need just the right amount to maximise your opportunities for repayment, and no more.
• Keep payments the same. By maintaining your compulsory mortgage repayments – even if interest rates drop – you’ll make more of a dent in the balance of your loan. The reality is that a 1% drop on a $500,000 mortgage may mean you only save $70 a week. If instead, you keep paying that into your mortgage, you’ll pay it off five years earlier, saving yourself over $100k in interest.

The difference between sinking and swimming when it comes to this method is discipline. Your revolving credit isn’t there to be used as an overdraft for new shoes and car parts. The money should be reserved for bringing down your mortgage as quickly as you can.

Why choose revolving credit over offset mortgages?

An offset mortgage takes the positive balance in your savings account and deducts it from the balance of your mortgage. You then only pay interest on the difference between the two.

Offset mortgages are based on floating interest rates, usually with no fixed term. You can withdraw money from your savings, which will increase the amount of capital you pay interest on. Same goes for the opposite – depositing money will decrease the amount of money you’re charged interest for.

While offset mortgages are an option, your savings will only offset the interest you pay. They won’t actually bring down the capital of your loan, like paying into your revolving credit will. And paying down the capital is where the real savings are! A revolving credit also gives you the flexibility to make withdrawals in emergencies, or improvements to your home.

Work with a broker to get the best structure

Reducing the term of your home loan is a no-brainer – why pay more if you don’t have to? A lot of people don’t know that mortgage brokers like Global Finance earn commissions from the banks – so their services are free to homeowners. A broker will also help you to restructure your mortgage regularly, so you’re taking full advantage of revolving credit. In some cases, Global Finance has helped clients get debt-free is less than half the time.

Speak to a Global Finance team member to see how revolving credit and restructuring your loan could work in your favour.