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    The pros and cons of re-structuring your mortgage

    Most of us need a financial safety net for emergencies or big-ticket items. Credit cards and hire purchases can be good options, but traditionally they come with high interest rates. On the other hand, if you own a house with at least 20% equity, you could be sitting on funding that gives you a more affordable line of credit.

    So, with interest rates trending upwards, is a revolving credit on your mortgage the smartest way to spend and save your hard-earned money?

    1: Revolving credit – a giant overdraft

    It’s best to think of revolving credit as a bank account that uses the equity in your home. Your mortgage provider will give you a credit limit, and the account balance will go up and down as you pay money in and out.

    For example, you have a $50,000 revolving credit. You spend $25,000 on a new car, renovations and other monthly expenses, and you pay it back every month when you get paid. The interest on that $25,000 is calculated daily, so you’ll want to pay back any funds you withdraw as soon as possible to keep interest costs low.

    2: The benefits of revolving credit

    Only pay interest on spending
    With revolving credit, you pay interest on the amount you draw down and nothing on the undrawn balance. Your bank will calculate your interest each day based on the outstanding balance in your account, and the accumulated interest gets charged at the end of the month.

    • Flexible repayments
    Revolving credit gives you access to money when you need it most. This can be handy in today’s times when banks’ lending criteria is changing and you may not be If you don’t need the money, you pay nothing. And if you do use it, the loan can be paid back when it best suits you. Instead of the usual set dates and set repayments, revolving credit allows much more flexibility.

    Furthermore, you can leave spare cash in your revolving credit account if you spend less than you earn overall. This will allow you to pay it down quickly and use any extra money to take a chunk out of your mortgage.

    • Access lower interest rates
    Even now, with mortgage interest rates up at 6-7%, you’re getting a much better deal than you would with more expensive lines of credit. If you need to borrow money for big-ticket items, and you know you can repay the balance in the short term, a revolving credit could save you thousands over the life of the loan.

    3: The risks of revolving credit

    • You may end up paying more interest in the long run
    Because revolving credit doesn’t require set repayments, you must be self-disciplined. If you buy a car with revolving credit, the interest rate may be lower, but it’s up to you to pay it back within a reasonable time frame. Otherwise, you could accumulate more interest.

    For example, borrowing $20,000 for five years at 12% costs $26,700. Borrowing the same amount at 7% using a revolving credit and repaying it over 15 years costs $32,400.

    • It can be easy to overspend and rack up more debt (if you’re not careful)

    It’s crucial to keep track of your income and spending and ensure you can afford to repay what you’ve spent. Try to pay down the balance as often as possible and keep one step ahead.

    • Interest rates on a revolving credit line are subject to change

    Revolving credit interest rates are variable, not fixed. In some months, they’ll be higher and in others, they’ll be lower. This fluctuation can make it difficult to budget for monthly payments, so it’s best to always stay in saving mode, regardless of rates.

    4: Quick tips for managing a healthy revolving credit

    Set up a monthly direct debit to pay down your credit so you stay ahead of repayments.

    Send your wages directly to your revolving credit account and repay your mortgage faster with any surplus.

    Use the interest-free period on your credit card for weekly expenses, then pay it off using your revolving credit on the due date.

    Speak to a mortgage broker to ensure your home loan structure suits your financial goals.

    Before going ahead, budget for the repayments

    A revolving line of credit can be a great option for many homeowners. The lower interest rates help you save money over the life of the loan, and the easy access to funds means you’re safe in an emergency. However, as with any financial decision, taking out a revolving line of credit should only be done after some consideration. A mortgage broker can help you budget for the repayments and determine which type of account charges the lowest total loan interest.

    Speak with the trusted mortgage advisors at Global Finance today to see if this type of credit is right for you.

    The information and articles published on this website are true and accurate to the best of the Global Finance Services Ltd knowledge. The information given in articles on this website should not be substituted for financial advice. Financial advice should always be sought.  No person or persons who rely directly or indirectly upon information contained in this article may hold Global Financial Services Ltd or their employees liable.